A lot of people say there’s no such thing as asset inflation [1] and I find that very confusing. Hypothetically, if we add $1T to the economy and everyone invests it into stocks, is that not inflation? I guess economists say it’s not, but it feels like a pedantic argument about assets being “overpriced” not “inflated”.
I think our current method of measuring inflation against the CPI is nonsense, the basic premise that you can assume the price of e.g. milk is stable doesn’t even make sense. There’s changes in manufacturing, quality, brands, and market demand that aren't accounted for in the CPI.
Measuring inflation (or whatever you want to call the difference between an asset's nominal value and it's intrinsic value) is still useful, but the current method of pegging everything against the bag-of-goods in the CPI seems like an overly simplistic model. This approach of normalizing asset prices against the M1 supply seems more reasonable to me. The intrinsic dollar value of an asset is its value relative to how many dollars there are, not relative to whatever the price of milk is.
Edit: I am clearly not an economist, please see some of the informative comments below. In particular, it sounds like the CPI does account for some complexities, asset inflation is more commonly supported than I thought, but normalizing by M1 might not make any more sense than CPI.
Mainstream economists know that CPI isn't accurate because of changes in demand. So they created other indicators (like chained CPI [0]) to account for changes in the basket of goods.
Normalizing against the M1 is an not very meaningful because ignores the fact that the price of a dollar is subject to demand as well. In times of high demand for dollars (like right now), the supply of money (the M1) needs to increase to for the price of a dollar to not rise.
In other words, stock prices normalized to the M1 has the same amount of meaning as stock prices normalized to the number of loaves of bread the country produces, or the number of cars. It's nonsense — you're comparing a price to a metric that only takes into account half of the equation (only supply)!
Sidenote: When the price of a dollar rises, that's deflation; when it falls, that's inflation. That's also why "asset price inflation" isn't precise — inflation measures the change in price of a currency, not an asset. Maybe individual assets go up or down in price, but that happens in response to consumer demand shift. The Fed's mandate is to manage inflation, which is affected by changes in aggregate consumer demand. Therefore, Congress delegated it tools to influence consumer demand as a whole, but not tools to shift demand from one asset to another.
The phenomenon you're observing is: the Fed's monetary policy helps the US grow, which benefits corporations and increases stock prices. The only way the Fed can prevent that is to... stop the economy from growing by letting our currency deflate? Which sounds bad? I.e. the Fed can't do anything to shift consumer demand, short of causing a recession.
TD;DR: If you think stonks are overvalued, then blame Congress, not the Fed. They're the ones who have the power to change that without causing a recession.
> I think our current method of measuring inflation against the CPI is nonsense,
It's not nonsense for policies that are directly concerned with consumer prices, which most that the CPI (or, more precisely, any of the CPIs, of which there are several) is used for do. We have lots of other inflation measures (, industry specific PPIs, for instance) for other purposes.
> Measuring inflation (or whatever you want to call the difference between an asset's nominal value and it's intrinsic value) is still useful
That's not what inflation is supposed to measure, because that's a nonsense thing to try to measure, because there is no such thing as intrinsic value.
> but the current method of pegging everything against the bag-of-goods in the CPI seems like an overly simplistic model.
How? Consumer prices are final prices. Everything else is instrumental to producing final goods and services.
> The intrinsic dollar value of an asset is its value relative to how many dollars there are
No it's not, and even if it was, that wouldn't make M1 a sensible measure. Why not the actual number of actual dollars there are: monetary base. Or something that better captures the number of effective dollars, M2.
I think a WSJ article would call this "multiple expansion." I lost a lot of coins betting against the market recovery going into the summer of 2020. Because printing free money must have consequences, yes? Turns out I could not have been more wrong. Turns out, all the free money printing around the world has found its way into other assets. Namely, the US Equity markets and BTC.
The standard definition of inflation is the general increase of prices. If only a subset of items increase in price, it's not really inflation.
It is tempting to say that you can have asset inflation while other assets deflate, but it's not consistent with the general topic of inflation that implies the currency gets devalued.
If the government said that it would collect a special tax to all goods but stocks of 1$, it will increase prices of many goods but it will not be inflation. It's a change in the relative price of goods.
I suspect that the CPI is a good measure of how much social unrest an inflationary event is likely to cause in the short term. One may decry the rich getting richer at the expense of everyone else but one is unlikely to start a revolution unless you yourself feel poorer.
Of course there’s asset inflation. Inflation is not uniformly distributed across all industries and markets, and sometimes it takes a very long time for imbalances to dissipate.
It’s similar to how certain industries can crash while others can boom at the same time. A non-uniform economy is such a basic and intuitive concept, it’s hard to believe it needs to be argued to the average layman.
If you wanna redefine inflation away from economists mean to a more colloquial meaning of the word then sure, that’s inflation. But it also doesn’t tell you anything.
This is very confused "Internet economics" take on the issue.
Money in band account that is not used is just a number. As Fed puts more money into the economy, the velocity of money decreases as the money is used less. https://fred.stlouisfed.org/series/M2V
Federal Reserve can increase and decrease effective money supply as it pleases. Money supply does not determine the prices as we have learned over last two decades.
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Edit: some real issues affecting stock price valuation.
(2) low real interest rates, typically measured as yields on inflation-indexed government bonds https://fred.stlouisfed.org/series/DFII10 If real interest rate is 10%, only this years earnings matter. If the interest rate is very low or negative, like they are now, time horizons grow accordingly.
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Edit2. "real" things in economy are things like real output.
The level of goods and services produced depends on the factors of production. How much capital, labor, level of technology rather than the amount of currency circulating. This means that the money supply can't affect the real level of output in the long run.
> Money in band account that is not used is just a number. As Fed puts more money into the economy, the velocity of money decreases as the money is used less. https://fred.stlouisfed.org/series/M2V
A couple questions because I don't understand this very well.
Do we have an idea how much is actually sitting in a bank account vs being put into the market?
And, if people put money into stocks and park it there, wouldn't the velocity still be much lower than it usually is (when people are spending more on goods and services)? My interpretation of what's being shown here is that a large amount of newly "printed" money has gone into the stock market, thereby inflating asset prices. I don't see how low velocity refutes that.
> Federal Reserve can increase and decrease effective money supply as it pleases. Money supply does not determine the prices as we have learned over last two decades.
That's assuming, contrary to the motivation for loose monetary policy, that there wouldn't have been deflation without it. It's not loose money produces low velocity but loose money as a reaction to low velocity.
> Money supply does not determine the prices as we have learned over last two decades.
I don't think we can just accept this as fact, based on two decades evidence. The Phillips curve held for much longer for two decades, until it didn't. 2 decades of verified observation cannot be extrapolated into an infinite future.
> Federal Reserve can increase and decrease effective money supply as it pleases
It can adjust monetary base as it pleases, effective money supply of the type measured by M1 and M2 relies on market behavior which the Fed can't control as well as monetary base, which it can.
On a time scale of decades, you’re absolutely right—the money supply can have very little effect on prices of consumer goods. But... things change. Sometimes abruptly.
I find the "Internet economics" argument more compelling than your argument that "Money supply does not determine the prices".
It's intuitive. You increase the amount of money chasing assets, asset prices go up. It's not affecting the price of milk or electronics. But look at land, housing, tuition, medical, stocks, bonds, and gold.
CPI is determined by M1V , i.e. velocity of M1. Since M1 is already out there, we just have to wait for the V. For now it's parked in the inflated stocks.
Most importantly, without high M1, high M1V is not possible.
I was looking at that earlier today to try to get a feel for if the stock market is really at record highs, or if it's just the Dollar and other major currencies that are just at record lows.
Note, that massive crash on the chart after 1971 is the US abandoning the gold standard (where you could exchange US dollars with the government for a fixed amount of gold) and the massive devaluing of the US dollar, and massive surge in the price of gold that followed.
But I thought the most interesting part is it clearly shows we're not at 2000 bubble levels right now. Which it looks like we are if you just look at the dollar denominated stock market value.
But this isn't accurate either. Gold is highly correlated with interest rates. Why would I want to hold a rock that yields nothing if there are bonds that yield a real return?
As of now we haven't hit a regime of negative real yields on long dated treasuries in the US. After being at ZIRP for decades with new inflation fears, I'd bet gold will continue to be punished as yields rise, so you may never see that same signal from Y2K.
My current portfolio is, say, 30 times my yearly living expenses. All I care about is that it will continue to grow in a way that stays at/above this ratio, so I will be able to retire early.
The pace at which my yearly expenses inflate is much more correlated to CPI than money supply. My expenses haven’t changed much between 2019, 2020 and 2021 (projected), despite the large money printing, and my consumption pattern has been the same.
> The pace at which my yearly expenses inflate is much more correlated to CPI than money supply. My expenses haven’t changed much between 2019, 2020 and 2021 (projected), despite the large money printing, and my consumption pattern has been the same.
What were the changes in your health insurance premiums(employer+employee)/deductible/oop max?
As an example, my parents’ deductible went from $3,450 to $6k, monthly premium from $1,137 to $1,232 between 2020 and 2021.
My expenses consistently go up quite a bit, far more than any government number. Both for my businesses and at home. My taxes also reliably go up more than CPI figures. Land has especially gone up.
Also, if you were planning on purchasing a home in any popular area of the past 10+ years, the lack of price increase in food or tech would have been meaningless in the face of land price increases.
You shouldn’t care. This chart is making up claims of “obvious” inflation (despite no evidence) to push BTC and other cryptos. (That’s why the dropdown has crypto coins.)
Also, the person doesn’t really understand monetary policy or macroeconomics — inflation is measured by changes in the price of a currency. M1 only measures supply. The other half of the price equation (that is missing from this chart) is the demand of the currency.
The M2 is growing because interest rates are dropping. But interest rates are at 0, so they can't drop anymore. So there is reason to believe that we can not sustain our current trajectory any longer.
The point isn’t that people with assets should care. The point is that people who hold dollars should care because eventually they’ll need to convert those dollars into assets.
Why would you adjust for usd money supply? The only reason my (uninformed) self sees is that it’s arbitrary but fits a fiscal Hawk narrative. Fwiw I’m worried about inflation, but this seems uninteresting.
The claim is that there is an asset bubble. In other words, stocks and real estate are being inflated, whereas the products that constitute the traditional measure of inflation (basket of goods with bread milk and eggs in it) are not.
This attempts to show the “real” inflation so to speak.
You have to adjust nominal returns with something, and exactly what you use is a matter of style and taste. Exactly what adjuster to use is always arbitrary.
Money supply is a lot simpler than inflation, because something like M2 is a pretty simple sum while inflation is a weighting that is a bit hard to follow the implications of (the handbook for how to calculate inflation is a bit of a doorstop, from memory).
Plus if an investment aren't even keeping a constant slice of the monetary pie an investor has good reason to be nervous about their strategy. There is a monetary firehose out there and it makes sense to get in on it.
I’m super sure why tho. Can’t we expect that printing dollars has an effect on its value? Aren’t stocks measured in dollars? If the value go down and I sell, aren’t I getting less purchasing power than I would have otherwise?
If the red line is the "M1-adjusted" price I would suggest having the "-adjusted" as part of the dropdown box, or some other way of making that more obvious. At first I thought the red line was just "M1".
at least the author also provides the m2-adjusted, though it's not quite billed.
you don't end up with the narrative that money printing was the entirety of equities performance in 2020.
Whether there is an unusual inflation or not, "inflation is skyrocketing" is for sure a popular meme among the tech crowd. It nicely fits with the libertarian mindset, "we are smarter than experts" narrative, some asset shilling/market manipulation (BTC, TSLA) and probably the fact that everyone in the tech bubble is either themselves a millionaire or knows a bunch of millionaires who compete for the same constrained resource, e.g. housing in the SFBA or, again, BTC.
Now, since the memes are actually very potent force, I wonder if they create a self-fulfilling feedback loop where assets do rise first and foremost because everyone believes there is an inflation.
So basically, if the Fed wasn’t printing money the rich’s wealth would have far greater intrinsic value, and they could be content with hoarding cash or making less risky investments, because there is little to no inflation to fight against.
But because of all the money printing, they have to run in place just to stand still, so they funnel their money into assets like stocks, which the general public also invests in and gets a benefit from the rising stock price. Meanwhile, the actual day to day items that the general public relies on to live that are tracked by the CPI are mostly unaffected by this.
[+] [-] choxi|5 years ago|reply
I think our current method of measuring inflation against the CPI is nonsense, the basic premise that you can assume the price of e.g. milk is stable doesn’t even make sense. There’s changes in manufacturing, quality, brands, and market demand that aren't accounted for in the CPI.
Measuring inflation (or whatever you want to call the difference between an asset's nominal value and it's intrinsic value) is still useful, but the current method of pegging everything against the bag-of-goods in the CPI seems like an overly simplistic model. This approach of normalizing asset prices against the M1 supply seems more reasonable to me. The intrinsic dollar value of an asset is its value relative to how many dollars there are, not relative to whatever the price of milk is.
1. http://noahpinionblog.blogspot.com/2013/07/asset-price-infla...
Edit: I am clearly not an economist, please see some of the informative comments below. In particular, it sounds like the CPI does account for some complexities, asset inflation is more commonly supported than I thought, but normalizing by M1 might not make any more sense than CPI.
[+] [-] tylerhou|5 years ago|reply
Normalizing against the M1 is an not very meaningful because ignores the fact that the price of a dollar is subject to demand as well. In times of high demand for dollars (like right now), the supply of money (the M1) needs to increase to for the price of a dollar to not rise.
In other words, stock prices normalized to the M1 has the same amount of meaning as stock prices normalized to the number of loaves of bread the country produces, or the number of cars. It's nonsense — you're comparing a price to a metric that only takes into account half of the equation (only supply)!
Sidenote: When the price of a dollar rises, that's deflation; when it falls, that's inflation. That's also why "asset price inflation" isn't precise — inflation measures the change in price of a currency, not an asset. Maybe individual assets go up or down in price, but that happens in response to consumer demand shift. The Fed's mandate is to manage inflation, which is affected by changes in aggregate consumer demand. Therefore, Congress delegated it tools to influence consumer demand as a whole, but not tools to shift demand from one asset to another.
The phenomenon you're observing is: the Fed's monetary policy helps the US grow, which benefits corporations and increases stock prices. The only way the Fed can prevent that is to... stop the economy from growing by letting our currency deflate? Which sounds bad? I.e. the Fed can't do anything to shift consumer demand, short of causing a recession.
TD;DR: If you think stonks are overvalued, then blame Congress, not the Fed. They're the ones who have the power to change that without causing a recession.
[0] https://www.brookings.edu/blog/up-front/2017/12/07/the-hutch...
[+] [-] dragonwriter|5 years ago|reply
It's not nonsense for policies that are directly concerned with consumer prices, which most that the CPI (or, more precisely, any of the CPIs, of which there are several) is used for do. We have lots of other inflation measures (, industry specific PPIs, for instance) for other purposes.
> Measuring inflation (or whatever you want to call the difference between an asset's nominal value and it's intrinsic value) is still useful
That's not what inflation is supposed to measure, because that's a nonsense thing to try to measure, because there is no such thing as intrinsic value.
> but the current method of pegging everything against the bag-of-goods in the CPI seems like an overly simplistic model.
How? Consumer prices are final prices. Everything else is instrumental to producing final goods and services.
> The intrinsic dollar value of an asset is its value relative to how many dollars there are
No it's not, and even if it was, that wouldn't make M1 a sensible measure. Why not the actual number of actual dollars there are: monetary base. Or something that better captures the number of effective dollars, M2.
[+] [-] marricks|5 years ago|reply
If and when that money injection moves around to affect the price of bread will be quite important though.
[+] [-] kgwgk|5 years ago|reply
https://www.bls.gov/cpi/quality-adjustment/questions-and-ans...
[+] [-] siculars|5 years ago|reply
[+] [-] conanbatt|5 years ago|reply
It is tempting to say that you can have asset inflation while other assets deflate, but it's not consistent with the general topic of inflation that implies the currency gets devalued.
If the government said that it would collect a special tax to all goods but stocks of 1$, it will increase prices of many goods but it will not be inflation. It's a change in the relative price of goods.
[+] [-] lumost|5 years ago|reply
[+] [-] CyberRabbi|5 years ago|reply
It’s similar to how certain industries can crash while others can boom at the same time. A non-uniform economy is such a basic and intuitive concept, it’s hard to believe it needs to be argued to the average layman.
[+] [-] zz865|5 years ago|reply
I think most people agree there is a lot of asset inflation. Your link doesn't match your quote either.
[+] [-] addicted|5 years ago|reply
[+] [-] nabla9|5 years ago|reply
Money in band account that is not used is just a number. As Fed puts more money into the economy, the velocity of money decreases as the money is used less. https://fred.stlouisfed.org/series/M2V
Federal Reserve can increase and decrease effective money supply as it pleases. Money supply does not determine the prices as we have learned over last two decades.
---
Edit: some real issues affecting stock price valuation.
(1) Global savings glut https://en.wikipedia.org/wiki/Global_saving_glut
(2) low real interest rates, typically measured as yields on inflation-indexed government bonds https://fred.stlouisfed.org/series/DFII10 If real interest rate is 10%, only this years earnings matter. If the interest rate is very low or negative, like they are now, time horizons grow accordingly.
---
Edit2. "real" things in economy are things like real output.
The level of goods and services produced depends on the factors of production. How much capital, labor, level of technology rather than the amount of currency circulating. This means that the money supply can't affect the real level of output in the long run.
[+] [-] swixi|5 years ago|reply
A couple questions because I don't understand this very well.
Do we have an idea how much is actually sitting in a bank account vs being put into the market?
And, if people put money into stocks and park it there, wouldn't the velocity still be much lower than it usually is (when people are spending more on goods and services)? My interpretation of what's being shown here is that a large amount of newly "printed" money has gone into the stock market, thereby inflating asset prices. I don't see how low velocity refutes that.
[+] [-] dragonwriter|5 years ago|reply
That's assuming, contrary to the motivation for loose monetary policy, that there wouldn't have been deflation without it. It's not loose money produces low velocity but loose money as a reaction to low velocity.
[+] [-] JMTQp8lwXL|5 years ago|reply
I don't think we can just accept this as fact, based on two decades evidence. The Phillips curve held for much longer for two decades, until it didn't. 2 decades of verified observation cannot be extrapolated into an infinite future.
[+] [-] dragonwriter|5 years ago|reply
It can adjust monetary base as it pleases, effective money supply of the type measured by M1 and M2 relies on market behavior which the Fed can't control as well as monetary base, which it can.
[+] [-] jkhdigital|5 years ago|reply
[+] [-] zeckalpha|5 years ago|reply
[+] [-] eloff|5 years ago|reply
It's intuitive. You increase the amount of money chasing assets, asset prices go up. It's not affecting the price of milk or electronics. But look at land, housing, tuition, medical, stocks, bonds, and gold.
[+] [-] cft|5 years ago|reply
Most importantly, without high M1, high M1V is not possible.
[+] [-] eloff|5 years ago|reply
I was looking at that earlier today to try to get a feel for if the stock market is really at record highs, or if it's just the Dollar and other major currencies that are just at record lows.
Note, that massive crash on the chart after 1971 is the US abandoning the gold standard (where you could exchange US dollars with the government for a fixed amount of gold) and the massive devaluing of the US dollar, and massive surge in the price of gold that followed.
But I thought the most interesting part is it clearly shows we're not at 2000 bubble levels right now. Which it looks like we are if you just look at the dollar denominated stock market value.
[+] [-] fny|5 years ago|reply
As of now we haven't hit a regime of negative real yields on long dated treasuries in the US. After being at ZIRP for decades with new inflation fears, I'd bet gold will continue to be punished as yields rise, so you may never see that same signal from Y2K.
[+] [-] deanmoriarty|5 years ago|reply
My current portfolio is, say, 30 times my yearly living expenses. All I care about is that it will continue to grow in a way that stays at/above this ratio, so I will be able to retire early.
The pace at which my yearly expenses inflate is much more correlated to CPI than money supply. My expenses haven’t changed much between 2019, 2020 and 2021 (projected), despite the large money printing, and my consumption pattern has been the same.
So, why should I care? Genuine question.
[+] [-] lotsofpulp|5 years ago|reply
What were the changes in your health insurance premiums(employer+employee)/deductible/oop max?
As an example, my parents’ deductible went from $3,450 to $6k, monthly premium from $1,137 to $1,232 between 2020 and 2021.
My expenses consistently go up quite a bit, far more than any government number. Both for my businesses and at home. My taxes also reliably go up more than CPI figures. Land has especially gone up.
Also, if you were planning on purchasing a home in any popular area of the past 10+ years, the lack of price increase in food or tech would have been meaningless in the face of land price increases.
[+] [-] tylerhou|5 years ago|reply
Also, the person doesn’t really understand monetary policy or macroeconomics — inflation is measured by changes in the price of a currency. M1 only measures supply. The other half of the price equation (that is missing from this chart) is the demand of the currency.
[+] [-] ItsMonkk|5 years ago|reply
The M2 is growing because interest rates are dropping. But interest rates are at 0, so they can't drop anymore. So there is reason to believe that we can not sustain our current trajectory any longer.
[+] [-] CyberRabbi|5 years ago|reply
[+] [-] Invictus0|5 years ago|reply
[+] [-] sf_rob|5 years ago|reply
[+] [-] YuriNiyazov|5 years ago|reply
This attempts to show the “real” inflation so to speak.
[+] [-] roenxi|5 years ago|reply
Money supply is a lot simpler than inflation, because something like M2 is a pretty simple sum while inflation is a weighting that is a bit hard to follow the implications of (the handbook for how to calculate inflation is a bit of a doorstop, from memory).
Plus if an investment aren't even keeping a constant slice of the monetary pie an investor has good reason to be nervous about their strategy. There is a monetary firehose out there and it makes sense to get in on it.
[+] [-] kvz|5 years ago|reply
I’m super sure why tho. Can’t we expect that printing dollars has an effect on its value? Aren’t stocks measured in dollars? If the value go down and I sell, aren’t I getting less purchasing power than I would have otherwise?
[+] [-] kvz|5 years ago|reply
[+] [-] FartyMcFarter|5 years ago|reply
[+] [-] Wolfenstein98k|5 years ago|reply
MMT is being tried in realtime, even as the debate roundly defeats it.
[+] [-] unknown|5 years ago|reply
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[+] [-] unknown|5 years ago|reply
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[+] [-] jzer0cool|5 years ago|reply
[+] [-] unknown|5 years ago|reply
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[+] [-] gimmeThaBeet|5 years ago|reply
[+] [-] anigbrowl|5 years ago|reply
[+] [-] yks|5 years ago|reply
Now, since the memes are actually very potent force, I wonder if they create a self-fulfilling feedback loop where assets do rise first and foremost because everyone believes there is an inflation.
[+] [-] xwdv|5 years ago|reply
But because of all the money printing, they have to run in place just to stand still, so they funnel their money into assets like stocks, which the general public also invests in and gets a benefit from the rising stock price. Meanwhile, the actual day to day items that the general public relies on to live that are tracked by the CPI are mostly unaffected by this.
Brilliant!
[+] [-] pandeiro|5 years ago|reply