Conversation

4) Anyway: over the past decade, western central banks have increased monetary supply. A lot. US: Change in $Trillions M2 Debt M2/yearDebt/year 1960-20087 9 0.10.2 2008-20207 14 0.61.2 2020-20227 7 3.53.5

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5) Why? Well, let's start with a case where printing money doesn't do _anything_, and then find the differences. Let's say that the gov't prints $0.50 for each $1 that exists, and airdrops those dollars pro-rata on everyone; so if you had $6 before, you have $9 now.

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6) This doesn't accomplish anything, really: it's just a 1.5-for-1 stock split in the US Dollar. If a loaf of bread cost $4 before, it costs $6 now; everyone has 1.5x as many USD, and all prices go up 1.5x.

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7) So what does printing money do? Well, let's say that, instead of giving out the 0.5x new money pro-rata, you give it out to some public goods project, or you give each person an equal amount (rather than pro-rata to their old wealth). Now, there's _real_ inflation.

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8) Why might you want that? Well, it's basically a tax on USD holdings; it disincentives keeping your wealth in dollars. And so it incentivizes investing, or doing commerce. Maybe you just think people are scared or risk-averse, especially during a recession.

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9) So you can use inflation to counter-balance fear in markets. But for that to work, *someone* has to end up holding the dollars, after the commerce is done. Who is that holding the bag? Maybe it's foreign governments, and this is the tax on them getting your stability.

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10) Maybe it's people cashing out. Alice founds a company, XYZ. She runs XYZ for a while, all her wealth is in XYZ, and she wins to inflation. After she's made a lot of money, she sells it to investors, and holds USD. It decays a bit, but she secures a comfortable life.

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11) Finally: let's say that Bob wants to buy a widget from Alice. It costs Alice $5 to make, and it's worth $7 to Bob. In theory, Alice should sell it to Bob. But Alice wants to make profit! So she might charge $8, and then the economy isn't efficient.

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12) By incentivizing transactions and investing over holding USD, maybe inflation can cause some positive sum transactions to "cross the bid ask spread", so to speak.

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13) Ok, so there are some reasons that moderate inflation can be good. By essentially disincentivizing holding fiat, it can compensate for the risk and spreads involved in commerce, causing positive sum trades to happen.

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14) It makes sense, then, that monetary supply started increasing more quickly in 2008 and 2020: the recession and COVID, respectively, increased fear in the markets, and so maybe some quantitative easing was useful to compensate. How much, though?

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15) Well, I don't know for sure! But I think a reasonable heuristic is: You want it to make sense for companies to invest in their operations. If the typical company has a P/E of ~20, then it's taking on risk to grow capital at 5%/year. So inflation had better be < 5%/year!

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16) And, in fact, since 2000, inflation has averaged ~2.3%/year. So far, everything looks reasonable: the gov't keeps printing $, it causes ~2.5% inflation, it offsets the risk of investing, and scales up during recessions when risk is the highest. So what's the worry?

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17) Well, let's return to the rate of monetary supply increase. M2 has been about $20T. Also, recently monetary supply/debt/etc. have been increasing at about $3.5b/year--so roughly 17%/year. That's up from 10% over the past decade, and 3% over the 2000's. Uh oh?

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18) And so we reach the first deeply weird fact about the modern economy: that monetary supply has been increasing at about 5x the rate of inflation. Why? Which metric is correct? Has QE been roughly correctly targeted, or massively over-done?

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19) Well, inflation is measured via CPI. CPI is bread, and gym memberships, and clothing, and tuition. CPI has only increased a few % per year recently. But not everything is part of CPI. Is there a bias here? Is CPI measuring the right thing?

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20) I don't know what "right" means here. Let's try again: is it correctly measuring the impact of monetary policy? Well, over the past decade, there's been a huge increase in the amount of money in circulation. Where did that money go?

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21) A few secular trends: a) the world becomes digital b) the world becomes financial c) borrowing becomes way easier (a) means that the titans of web2 made a lot of money (e.g.

@elonmusk

). (b) means that the titans of finance made a lot of money (e.g. Buffet).

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22) (c) means that (a) and (b) can borrow against their equity (that they either created or invested in), increasing the liquid capital they have. All three of these point in the same direction: the richest people from 2022 are worth a lot more than the richest from 2007.

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Oprah, Trump And 49 Other Billionaires Who Dropped Out Of The Forbes 400 Ranks

23) Some of this is the rich getting richer; some is _new_ people climbing higher than anyone from 2007. But, one way or another, it's happening: forbes.com/sites/isabelle The richest people are worth 3x as much as 2007's richest. But _median_ income has only grown ~33%.

forbes.com

A flock of newcomer entrepreneurs pushed famous faces, including Donald Trump and Oprah Winfrey, off this year’s list of America’s richest people.

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24) And, the thing is--what drives CPI? Well, CPI is, basically, bread. Elon Musk is worth roughly one million times as much as the median American.

@elonmusk

does not eat one million loaves of bread per day. So CPI tracks the median American more so than the average one.

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25) And, in fact, CPI inflation has been roughly in line with median wage growth! So, ok, if

@elonmusk

doesn't buy $1m of bread, what *does* he buy $1m of?

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26) Ok, so, yeah, some things are up a lot more than CPI over the last few years.

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27) In particular, given the amount of wealth that has gone towards creating the richest in history, the assets whose prices have appreciated–the place that the 17% annual monetary supply increases have gone–are assets that a single person could spend millions of dollars on.

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28) So yes, cryptocurrencies. But also stocks, and high end housing, and private planes, and art, and NFTs, and sports teams (which, really, are themselves NFTs). In general, things you can invest in have gone up a lot. And things with limited supply. As have Giffen Goods.

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29) (An interesting aside: when a ton of capital flows into those assets, and prices appreciate, then the investors make money. Also capital is cheap, so they can borrow or raise, and then buy more, and then prices go up more, and then...)

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30) So, ok, CPI inflation has been somewhat stable, but other measures of price inflation have been huge, because CPI is in line with median wage growth and markets are in line with invested capital growth.

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