Cause of The Collapse

[Martin Hash]

Perhaps the inflation is already here - we're just searching for it on the store shelves when we should be looking at our mortgage and 401k.

Nice

[Fife]

https://www.investopedia.com/articles/i ... ation.asp

Investopedia says the reason the money printing doesn't lead to a collapse or hyperinflation is because the M0 money supply and M2 money supply are different animals. Stimulus hits the M0 money supply which is what the banks use to lend out via fractional reserve, multiplying the money in circulation. The M2 money supply "includes the effects of fractional reserve banking and credit".

Since the Wall Street bail-outs the banks *have not* been lending out the stimulus money. That means trillions go into the M0 money supply for the banks, but the banks don't lend it out to the public so it doesn't hit the M2 money supply (where consumers would have access to it). Instead, the banks use the printed money to offset the toxic assets on their balance sheets.

So ... if trillions of dollars are being printed - but they're only buying off the toxic assets of banks and never reaching the hands of consumers - you're not going to see that expected, direct, inflation. There are more dollars, but not in the hands of buyers, so free market prices aren't directly affected.

Anyway, that's what Investopedia says. I'm certainly unqualified to comment on it either way, but it is an explanation worth considering. When a system you think you understand (like basic economics in my case) doesn't behave the way you think it should - it means you don't understand something. There's obviously much I don't understand about the economy, but the M0/M2 money supply explanation provides answers to a questions I have about our current economic situation - aka "why isn't hyperinflation hitting".

Money supply is often thought of as a uniform density, like a gas filling up its container. Money's entropy is highly irregular IRL, though, and where the money goes first can make all the difference. This article on the Cantillon Effect refers to Hayek describing it as honey poured in a cup slowly making its way out to the edges.


Cantillon Effects and Money Neutrality

However, it is important to point to one key difference between the scope of Cantillon Effects and money neutrality. The Cantillon Effect refers to relative prices at the micro level. Money neutrality, on the other hand, refers to the aggregate production function, which means that relative prices are only captured in general terms, such as the real wage captured as a nominal wage index over a price-level index.

The first issue to note about this difference in scope is that the same wage and price-level indices could be attained with different relative prices at the micro level. It is possible that a change in money supply could trigger a change in relative prices at the micro level that ultimately results in the same wage and price levels. But this means that the composition of output would be different with and without the change in money supply. This composition of output is absent when money neutrality is envisioned as the level of output, independent of money supply.

Let us say that demand for each good is determined by consumers’ preferences and that supply is determined by the availability of factors of production and technology. If for some period of time a change in money supply alters resource allocation, then sustaining that money is neutral in the long-run (meaning that the economy always converges to the same equilibrium), then the equilibrium determinants should remain unchanged. In other words, the short-run effects of a change in money supply should not have an effect on either consumer preference or on factors of production. There is no reason for this to be the case. This means that money neutrality (at the micro level) is an assumption more than a fact.

"Inflation" to economists does not refer to the CPI. It refers to pumping up the supply of fiat money, which usually gets sent to the connected banks the firstest with the mostest. What normies think of as "inflation" (bumps in consumer prices) comes in as the cash finds its way, eventually, into the hands of consumers -- or as producers face increased costs across their spectrum. Prices go up in anticipation of the need to recapture increased costs. It's baked into the cake.

The rapid and unpredictable (price) inflation is real, alright. It's real and it's spectacular. It's just (mostly) stuck in the assets that Wall St cares about buying up. For now.


More on the Cantillon Effect:

https://fee.org/articles/the-cantillon- ... inanciers/

[SuburbanFarmer]

Excellent talk about how technology is actually degrading over time due to over-complexity.

https://tonsky.me/blog/good-times-weak-men/

[SuburbanFarmer]

Some magnificent scenery from Liberty City.