Conversation

Replying to

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.

1

11

224

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.

2

11

186

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.

1

12

202

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.

3

12

232

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?

3

14

197

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!

5

14

223

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?

3

13

189

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?

4

18

218

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?

7

16

246

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?

5

16

240

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?

5:15 PM · Mar 18, 2022Twitter Web App

Replying to

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.

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

5

21

265

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.

2

22

275

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%.

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

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

6

19

237

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.

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

8

22

282

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

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

16

31

340

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

5

13

191

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.

3

15

216

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.

4

21

329

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...)

3

15

201

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.

2

19

201

31) And if you average those out, you get something closer to what the monetary growth implies: that real, true inflation has probably been closer to 17% than 2.5%.

13

74

539

32) And 17% is a lot. So, in the end, I think that in some senses the straightforward answer is the correct one. The inflation has been here the whole time, hiding in plain sight. The worry, then, is hyperinflation, devaluation of the US dollar, and serious economic impact.

6

11

264

33) Does that mean that monetary policy has been bad and reckless? I don’t know–it’s complicated. Because we’ve only been talking about the inflation side of monetary policy. And, again, it’s not a coincidence that this has been the decade of QE.

2

8

160

34) In 2008, every bank almost failed. And then in 2020, the world economy half shut down for two years. And somehow, not only did we make it out with the financial system intact, but we made it through COVID without a recession–in fact, markets hit all-time highs! Oh, wait.

3

20

206

35) I mean, partially what happened, probably, was that commerce and investment were incentivized by loose monetary policy. And partially, the government effectively provided desperately needed bridge loans to companies that were going to have a bad few years because of COVID.

7

9

160

36) And so to some extent we made a trade, as a world. We accepted higher inflation that generally makes sense, in return for weathering a huge financial storm remarkably well. Yeah, price increases hurt, but honestly it’s way better than if you tacked 2008 on to COVID.

7

15

208

37) There’s another side to this, too, though. “Number go up.” See, if all you do is ‘stock split’ the US Dollar, handing everyone an extra 50%, it has no real economic impact… …as long as everyone mentally multiplies all price charts by ⅔ after the split.

2

9

158

38) But if you don’t adjust how you look at the charts, then it seems, I guess, like everything just went up 50%. Which is bad for inflation, but great for markets?

2

8

135

39) And so some of what’s happened over the last decade–and especially over the last few years–is that bad things happened (e.g. COVID) but markets went up instead of down, because we increased monetary supply.

3

11

145

40) And, I guess, it ‘tricked’ some of us into thinking that things were going great, because “number go up”, when really that $440 SPY buys about as much stuff today as $330 SPY bought a few years ago.

2

23

238

41) So what does all of this imply for the future? Well, on the one hand, inflation–true inflation–is high. Really high. High enough that it would generally be worrying. Does that mean markets will keep going up? Especially given that even CPI inflation is now high?

4

10

173

42) Maybe. But maybe not. Because to some extent, that should already be priced in to “efficient” markets. As soon as the world realized what was going to happen to policy because of COVID, prices should have adjusted to the full increase that all future QE would bring.

7

9

145

43) CPI increasing this year doesn’t make markets go up more: markets already knew that the monetary supply had increased, and didn’t have to wait for CPI to move.

3

13

156

44) Instead, CPI increasing this year had the effect of increasing political pressure to reduce inflation by tightening monetary policy. So increased inflation indicators sometimes lead to decreased inflation, because of policy reactions.

4

8

165

45) So I don’t know what this means going forward. On the one hand, there are real signs of tightening policy for the first time in a while. On the other hand, even the proposed rate hikes are a lot less than true inflation probably is, barely making a dent in real rates.

12

12

185

46) And also, there’s a war going on now, on top of COVID; there will be pressure to prevent markets from crashing, which means, well, you know…

4

13

173

47) So in the end–I don’t know what will happen going forward. I wish I were smart enough to see the future, rather than just the past. But I guess my main takeaways from MMT are: a) It probably lead to significant, serious inflation b) Also it probably prevented a recession

15

19

266

48) Those are, sometimes, two sides of the same coin. And, also: c) QE → number go up → easy to get financing → number go up → easy to get financing → …

10

14

198

49) We have, accidentally, been exploring Post-Modern Monetary Theory as a society. A system designed so that numbers mostly just go up and up and up, as they mean less and less and less.

17

48

394

50) Thus, BTC. And oil, and nickel, and SPY, and houses, and art, and bonds, and VC fund sizes, and private markets, and pretty much everything marked to market.

70

42

634

Show additional replies, including those that may contain offensive content

Show