It's the Fed. M1 is up 32% year to year. The stock market gets inflated as it did in 2002-07, 1998-2000, 1992, 1983-1987, etc. In the old days, before Keynes, it was known as a "crack-up boom".
https://www.investopedia.com/terms/c/crackup-boom.asp
Coronavirus Economics/Finance
- Thread starter groveChuck
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https://www.investopedia.com/terms/c/crackup-boom.asp
Peter C.
Veteran
Yes the amount of M1 money is crazy. Not only is the dollar backed by nothing the FED is allowing banks to hold almost nothing in reserve. Most people are unaware how precarious the current financial system is. If a run on the banks started the government would have to step in otherwise they would collapse. If banks are using all that extra m1 money leverage to speculate and the market crashes you could be looking at a repeat of what happen a few years ago. With the government having to bail them out.
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ahalpert
Major Contributor
Before Keynes? Keynes died in 1946...
That investopedia article says a "crack-up boom" ends with the "abandonment of the currency by market participants" - I wouldn't hold your breath for that. It also says there is a recession simultaneous to the credit expansion and that the boom is followed by a recession or depression. But this has been a banner year so far for my business. As far as I can tell, the economy is picking up steam.
And as for the Fed putting money in people's hands going into the stock market - maybe that's true with low interest rates, etc. I don't think that stimulus payments and unemployment end up in stocks because that money is distributed to the lower end of the income ladder. Stim checks phase out after $75k. Unemployment doesn't nearly make up for lost wages.
I think a bigger factor is forced savings. I know several well-heeled people who haven't been able to dine, travel, or go to entertainment as they usually do, and that money has to go somewhere. And it's thousands of dollars per month. The only question is if it stays in the market forever.
ahalpert
Major Contributor
Here's an article from June 2020 freaking out about the exact same thing - M1 being up 33.5% YOY https://www.forbes.com/sites/invest...-as-us-money-supply-explodes/?sh=1725425a7829
The beauty of peddling runaway inflation predictions is that there's always a market for it no matter how many times you've been wrong before. And the beauty of predicting an imminent crash is that eventually you'll be right.
The beauty of peddling runaway inflation predictions is that there's always a market for it no matter how many times you've been wrong before. And the beauty of predicting an imminent crash is that eventually you'll be right.
Peter C.
Veteran
https://youtu.be/L_f6R0DHNH0
This doesn't predict the market will crash or we will go into a recession/depression. It only illustrates how fragile the financial system currently is.
yes, there were economists before 1946. Go figure.
As the official inflation/CPI numbers do not include purchases of the financial instruments, it basically renders them meaningless. On top of that, there was a revision of the formulas late in the Reagan administration. Back in the 00's, I used to argue vigorously with some of the former officials from that era, with them claiming that inflation was under control. I told them that they ought to come down to Miami and talk to any real estate broker to be dissuaded of that notion. Nonetheless, they clung to their belief. Until, the subprime exploded, taking everyone else with it.
And the US, technically speaking, refused to support the dollar when it went off the Bretton Woods system in 1971. Since then, it only retains the advertising on the cover. An example that I like was our first American automobile, a 1976 Dodge Charger SE (essentially, Chrysler Cordoba without the rich Corinthian leather and a downrated 5.9L 8-cyl engine), which was sold new as a "personal luxury vehicle" for $5,500. These days, a 6.4L 8-cyl Challenger (ours was also two door) Scat Pack can run in excess of $50,000.
ahalpert
Major Contributor
I apologize for being dismissive, Peter. I just feel like people have been predicting runaway inflation for the last 30 years and it has yet to materialize in a way that everyone could agree on.
I feel like people learned the lessons of 70s stagflation a little too well. Btw, DLD, do you get all your financial insights from the 19th century?
Look at food prices, which are usually excluded from inflation calculations (because they're more volatile?). The rate of inflation in food prices doubled from like 1.9% to 4.5% over the past year but has since come down to 2.4%
Look at real estate prices in Manhattan, which tumbled as prices skyrocketed in the suburbs. Prices in my area are already reversing their upward climb as people stop moving out to the suburbs and start moving back to the city.
Stocks should definitely be excluded from inflation numbers. They have nothing to do with the cost of living or things Real People need to buy. There's an inherent degree of speculation there. (Do we consider a stock crash indicative of deflation? As they say, a stock market crash has accurately predicted a recession 9 out of the last 5 times.) And there are big macro level trends at work there that have nothing to do with inflation, such as a massive corporate tax cut being funneled into buybacks...
I feel like people learned the lessons of 70s stagflation a little too well. Btw, DLD, do you get all your financial insights from the 19th century?
Look at food prices, which are usually excluded from inflation calculations (because they're more volatile?). The rate of inflation in food prices doubled from like 1.9% to 4.5% over the past year but has since come down to 2.4%
Look at real estate prices in Manhattan, which tumbled as prices skyrocketed in the suburbs. Prices in my area are already reversing their upward climb as people stop moving out to the suburbs and start moving back to the city.
Stocks should definitely be excluded from inflation numbers. They have nothing to do with the cost of living or things Real People need to buy. There's an inherent degree of speculation there. (Do we consider a stock crash indicative of deflation? As they say, a stock market crash has accurately predicted a recession 9 out of the last 5 times.) And there are big macro level trends at work there that have nothing to do with inflation, such as a massive corporate tax cut being funneled into buybacks...
ahalpert
Major Contributor
BTW, on the subject of Keynes, he famously wrote, "The boom, not the slump, is the right time for austerity at the Treasury." It's not like he was forever stimulus spending. As I understand it, he advocated saving for a rainy day during the good times so that the government could be the lender and spender of last resort during recessions and avert the worst effects of a demand shock and help get the economy growing again. But a lot of Keynes opponents don't actually entertain his theories and just assume they know what they were.
Of course, we continued low interest rates and stimulus spending during the recent economic expansion because politics. But anyway...
Of course, we continued low interest rates and stimulus spending during the recent economic expansion because politics. But anyway...
filmguy123
Veteran
I don't know about that, I have a couple CPA friends who are pretty concerned. I am not terribly well versed in this but I would love to hear other's thoughts on our going off the gold standard and becoming a fiat currency:
https://wtfhappenedin1971.com/
As one of my CPAs showed me in a rather convincing way (however I couldn't recite it, perhaps someone else here could), the last 20 years has been a bit of an illusion in regards to growth. We've appeared to be on an upward trend, but due to currency dilution, we only reached equilibrium with the earlier 2000s in terms of buying power again in 2019. The takeaway was, no, we haven't regressed from 2000, we went downhill, then back up hill, but are no better off than 20 years ago. His concern was we just had a major spike in money printing though and it's unclear whether or not we will rebound in the same way in the next 20 years.
As for the food inflation... again I don't know much about that, over my paygrade, but does this calculation account for shrink-flation? IE the price of a bag of chips stays the same, but it drops 1oz in size. Same type of idea going out to a restaurant, $10 still for a plate, but the plate is slightly smaller and everyone offers small plates so you stack up the bill. Or the burger price doesn't increase, but fries are an add-on. Or the beer price stays the same, but it's now 12oz instead of a pint. Or the airfare ticket stays the same, but now luggage isn't included or you have to pay extra to have a seat that isn't in the back of the plane in the middle seat next to the toilet, etc.
I took my econ classes in the 1980's. All books were written by Paul Samuelson, who was proclaimed "the greatest economist of the second half of the 20th century". He also famously - or infamously, if you will - predicted that the Soviet economy would soon overtake the US. When the dust cleared on the USSR, the basic comparison had it at about 13% of the American. Pat Moynihan was so upset with the errors committed by the CIA, which estimated the Soviet economy as about 40% of the American or 300% over its actual performance, that he wanted to shut down CIA for good.
In any case, the consumer food price index is a crock of manure because it uses the "substitution bias", which is a trick to undercount the major component of the overall CPI. Shopping for food on a regular basis, I can see a 10%-30% jump on individual items from March, 2020. Moreover, fewer popular items are offered on sale than before.
https://en.wikipedia.org/wiki/Substitution_bias
In any case, the consumer food price index is a crock of manure because it uses the "substitution bias", which is a trick to undercount the major component of the overall CPI. Shopping for food on a regular basis, I can see a 10%-30% jump on individual items from March, 2020. Moreover, fewer popular items are offered on sale than before.
https://en.wikipedia.org/wiki/Substitution_bias
Peter C.
Veteran
Not at all. There are a few popular economic pundits who are always calling recession/depression. If they keep predicting it eventually they'll be right. I don't believe anyone can predict the future so it's better to understand the risk/reward out there and decide what level works for you.
Even though I feel the stock market is dangerously over valued, the underlying economy seems to be fine. The market might benefit from a correction.
ahalpert
Major Contributor
I call BS. Walmart keeps my receipts online from previous years. I'm going to compare the prices from a purchase made on December 30, 2019 for the first 4 items on the list with what they're selling for today.
A 5lb bag of clementines has gone from $5.14 to $5.28
A 3-pack of bell peppers has held steady at $3.37
Bananas have gone from 58 cents/lb to 59 cents/lb
Marketside chocolate chip cookies 3-pack held steady at $1.00
I've seen enough. Sounds like you're getting hosed
ahalpert
Major Contributor
OK, let's keep playing.
December 29, 2019: Peppermint tea purchased at $2.37. Today available for $2.37
Lactaid whole milk held steady at $3.88
December 27, 2019 2lbs organic carrots went from $2.84 to $2.86
Mainstays 1.8L stainless steel tea kettle held steady at $7.72
1lb marketside grass fed 85%/15% ground beef went from $5.46 to $5.78
Green&Black 85% chocolate held steady at $3.18
Take the L, dude
Matt Gottshalk
Resident Preditor
Now do beef.
Here's a chart for most commodities for up to 10 years:
https://tradingeconomics.com/commodities
...and your candy bars that cost the same... ever notice how they've been shaving the total net weight for years? Same with most snack foods. Package price is near meaningless.
FWIW my kids made a killing selling a few feeder hogs and meat birds this summer
On the commodities chart... noting the price of lithium, the exploding demand due to batteries, and Australia's position as one of the main sources in the world make's China's forceful play upon them become clear. Coupled with Taiwan suddenly becoming the largest supplier nations for finished advanced semiconductors, I think we all know what's about to happen.
https://tradingeconomics.com/commodities
...and your candy bars that cost the same... ever notice how they've been shaving the total net weight for years? Same with most snack foods. Package price is near meaningless.
FWIW my kids made a killing selling a few feeder hogs and meat birds this summer
On the commodities chart... noting the price of lithium, the exploding demand due to batteries, and Australia's position as one of the main sources in the world make's China's forceful play upon them become clear. Coupled with Taiwan suddenly becoming the largest supplier nations for finished advanced semiconductors, I think we all know what's about to happen.
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ahalpert
Major Contributor
Inflation causes a rise in the price of everything. You can't cherry pick. The cost of used cars exploded over the last year, for example, and people have hypotheses why, especially having to do with the price and availability of components for new cars which have been in short supply. And when the price of gas comes down, nobody claims that it's a sign of deflation.
I listed ground beef in my post above and showed the amount it had increased in that time period. That product (single lb 85%) is not in stock at walmart now. But here's a 3 lb of 93% purchased on July 16 2020 relative to today. It's the same price
I think the steaks have gotten more expensive but I can't compare because walmart doesn't tell me the weight or the price per weight of the steaks I bought in the past, just the weight range (0.625 - 1.1 lb) and price.
As I understand it, the most typical cause of inflation is an "overheated" economy due to rapid growth and a labor shortage that leads to a cycle of rising wages, rising business costs, and rising prices. This is why the Fed will raise interest rates to deter business investment and intentionally slow the economy is growth is accelerating too much. Government stimulus and the dollar supply doesn't have a big impact. We've had a lot of stimulus since the great recession but inflation has been below target.
ahalpert
Major Contributor
oh my god! lumber is tanking! it's deflation...
I think the story in that chart is mostly about how the economy looks different in a state of pandemic-related government-induced stasis vs "reopening". energy prices are way up now vs before. I would imagine that energy use has gone way up but that there are still constraints on supply.
the chocolate bars and other products I quoted are the same weight as before. and I'm pretty sure that statisticians would take such things into account...
I'm not saying that there isn't inflation. I just think it's been like 2% for a decade and will probably be 6ish this year. It doesn't seem like the massive price increases will be sustained or that they're felt across the board
That's not true. Everything has its own supply&demand curves.