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Summary

This video delves into the intricacies of inflation, using historical examples like Germany in 1923 and Zimbabwe in 2008 to illustrate the concept. It explains inflation as currency depreciation, measured by CPI, and how it redistributes wealth. The video discusses the challenges central banks face in maintaining price stability, the impact of inflation on economic growth, and the role of expectations in driving inflation. It also touches on the effects of inflation on asset prices and the strategies central banks use to control it, including managing public expectations.

Takeaways

• 📈 Inflation is the general increase in prices and the erosion of purchasing power over time, typically measured by the Consumer Price Index (CPI).
• 💵 Historical examples like Germany in 1923, Zimbabwe in 2008, and Hungary in 1946 illustrate the devastating effects of hyperinflation, where currency rapidly loses value.
• 🌐 The inflation rates in various countries have significantly impacted their economies, with some experiencing a million-fold increase over decades.
• 🔍 Central banks aim to maintain price stability and control inflation, which can be challenging even for renowned institutions like the Federal Reserve.
• 💼 Inflation is caused by an excess of money supply over the size of the economy, leading to increased prices due to too much money chasing too few goods.
• 🏛️ Governments and central banks use monetary policies like adjusting interest rates and printing money to control inflation, although these strategies are not always straightforward.
• 🌟 Moderate inflation is sometimes seen as beneficial as it encourages spending and investment, contributing to economic growth.
• 📉 Deflation, the opposite of inflation, can lead to a decrease in economic activity as people and businesses delay spending, expecting prices to fall further.
• 🏦 The relationship between inflation and asset prices, like stocks and real estate, is complex and can be influenced by various factors including government policies.
• 🌟 Central banks target an inflation rate of around 2% - 3% to promote a healthy economy, and they are willing to sacrifice short-term growth to maintain long-term stability.

Q & A

What was the situation with the Deutsche Mark in Germany in 1923?

In 1923, the Deutsche Mark in Germany became worthless due to hyperinflation. People were pasting their walls with banknotes and using them to light fires because the currency had lost its value, and prices were doubling every two days on average.

What was the annual inflation rate in Zimbabwe in 2008?

In 2008, Zimbabwe experienced an astronomical annual inflation rate, which was described as 7.3% multiplied by 10 to the power of 108, making it one of the highest inflation rates in history.

How did the hyperinflation in Hungary in 1946 affect prices?

In Hungary in 1946, prices doubled every 15.6 hours due to hyperinflation, which was disastrous for the local economy at the time.

What is the Consumer Price Index (CPI) and why is it important?

The Consumer Price Index (CPI) is an economic indicator that measures the trend of prices of common goods and services. It's important because it provides a measure of inflation, which is essentially the depreciation of currency.

How does inflation affect the purchasing power of money?

Inflation reduces the purchasing power of money over time. As prices increase, the same amount of money can buy fewer goods and services, meaning that money is worth less and less.

What is the primary goal of central banks regarding inflation?

The primary goal of central banks is to maintain price stability, which includes controlling inflation rates. They use monetary policy tools like adjusting interest rates and printing money to achieve this.

Why is a moderate level of inflation considered beneficial for an economy?

A moderate level of inflation is considered beneficial because it encourages spending and investment, which can stimulate economic growth. It also serves as a constant redistribution of wealth, preventing people from hoarding money and promoting productivity and spending.

What are the consequences of deflation, as seen in Japan's economy?

Deflation, as experienced in Japan, can lead to a decrease in economic activity. People may delay spending, expecting prices to fall further, which can result in reduced demand, lower production, and a vicious cycle that is difficult to break.

What are the three factors that can cause inflation according to the script?

The three factors that can cause inflation are: 1) Demand-pull inflation, where increased aggregate demand leads to higher production and prices. 2) Cost-push inflation, which occurs when production costs increase, leading to higher prices. 3) Built-in inflation, which happens when inflationary expectations become ingrained in wage and price-setting.

How does the unemployment rate reflect an economy's production capacity?

A high unemployment rate indicates that there is a significant amount of unused production capacity in the economy, as many people are not working. Conversely, a low unemployment rate suggests that the economy is operating near its full capacity, with most of the labor force employed.

What is the significance of expected inflation in economic theory?

Expected inflation is significant because it can become a self-fulfilling prophecy. When people anticipate that prices will rise, they may increase their spending or hoard goods, which can accelerate the velocity of money circulation and lead to actual inflation, even without an increase in the money supply.

Outlines

00:00

📈 Inflation and Currency Depreciation

This paragraph introduces the historical context of hyperinflation in Germany (1923), Zimbabwe (2008), and Hungary (1946), illustrating the drastic devaluation of currencies and the economic turmoil it caused. It explains the concept of inflation as currency depreciation, measured by the Consumer Price Index (CPI), and provides a comparison of CPI changes over time in various countries. The paragraph emphasizes the simplicity of the inflation mechanism, where an excess of money relative to the size of the economy leads to price increases.

05:01

💵 The Role of Inflation in Economic Behavior

The second paragraph delves into the psychological and behavioral effects of inflation. It discusses how inflation redistributes wealth and influences consumer spending habits, suggesting that moderate inflation can stimulate economic activity by encouraging spending and investment. The paragraph contrasts inflation with deflation, using Japan's experience as an example of the dangers of a deflationary spiral. It also touches on the concept of the 'misery index' and the preference of economists for economic growth over consumer comfort.

10:01

🌐 Global Perspectives on Inflation and Economic Policy

This paragraph explores the global impact of inflation, focusing on the targets set by central banks like the Federal Reserve and the European Central Bank. It discusses the challenges of maintaining a stable inflation rate and the economic policies used to achieve it, such as money printing and interest rate adjustments. The paragraph also examines the relationship between inflation and asset prices, particularly stocks and energy companies, using data from the IMF to illustrate the negative correlation between stock prices and inflation.

15:02

🏭 Production Capacity and Inflation Dynamics

The fourth paragraph examines the link between production capacity and inflation. It uses the example of a milk tea shop to explain how the availability of production resources affects price changes. The paragraph discusses the role of unemployment rates as an indicator of a country's production potential and how full employment can lead to higher inflation. It also touches on the concept of cost-push inflation and how supply shortages can exacerbate inflationary pressures.

21:34

💸 Monetary Policy and Inflation Expectations

The final paragraph addresses the role of monetary policy in managing inflation, particularly the challenges faced by central banks in controlling the money supply. It discusses the concept of 'expected inflation,' where public anticipation of price increases can itself cause inflation, even without additional money printing. The paragraph highlights the importance of managing inflation expectations through central bank communications and policy actions, using the Federal Reserve's approach as an example. It concludes with a broader reflection on the significance of understanding inflation for economic policy and global trends.

Keywords

💡Inflation

Inflation refers to the rate at which the general level of prices for goods and services is rising, and subsequently, the purchasing power of currency is falling. In the video, inflation is a central theme, with historical examples like Germany in 1923 and Zimbabwe in 2008 used to illustrate its extreme consequences. The video discusses how inflation is measured by the Consumer Price Index (CPI) and its impact on the economy, such as the redistribution of wealth and its role in economic policy.

💡Consumer Price Index (CPI)

The Consumer Price Index (CPI) is a measure that tracks the weighted average of prices of a basket of consumer goods and services, providing a data point on the rate of inflation. The video uses the CPI to demonstrate how prices have risen over the past 60 years in the USA, indicating the depreciation of the dollar's value. It serves as a common measuring indicator for the trend of price changes in common goods and services.

💡Hyperinflation

Hyperinflation is a term used to describe a period of extremely high inflation, typically characterized by a rapid and continuous increase in the general price level. The video script uses historical cases such as Germany after WW1 and Zimbabwe to illustrate the devastating effects of hyperinflation, where the currency becomes nearly worthless, and the economic and social consequences are dire.

💡Deflation

Deflation is the opposite of inflation, where there is a general decline in price levels, often associated with an increase in the real value of money. The video mentions deflation in the context of Japan's economy, where despite the central bank's efforts to print money, the country faced a credit crisis and entered a deflationary spiral, leading to a low-desire society and economic stagnation.

💡Central Banks

Central banks are金融机构 that manage a country's monetary policy, including controlling the money supply and interest rates. The video discusses how central banks like the Federal Reserve and the European Central Bank aim to maintain price stability and control inflation rates. It also touches on the challenges they face in managing inflation expectations and the economy.

💡Quantitative Easing

Quantitative easing is a monetary policy in which a central bank purchases government securities or other securities from the market to increase the money supply and encourage lending and investment. The video script refers to how central banks' balance sheets expanded as they engaged in quantitative easing to stimulate economies, which can potentially lead to inflation if not managed properly.

💡Demand-Pull Inflation

Demand-pull inflation occurs when an increase in aggregate demand for goods and services in an economy exceeds the supply, leading to a rise in prices. The video gives an example of a sudden desire for milk tea, causing an increase in its price and production, which in turn stimulates further economic activity and inflation.

💡Cost-Push Inflation

Cost-push inflation happens when the cost of production for goods and services increases, which companies then pass on to consumers in the form of higher prices. The video script implies this type of inflation when discussing how a decrease in productivity and an increase in the cost of goods can lead to higher inflation rates.

💡Interest Rates

Interest rates are the cost of borrowing money and the return on savings, set by central banks to influence the economy. The video explains how central banks use interest rate adjustments as a tool to control inflation. For instance, raising interest rates can cool down an overheated economy and reduce inflation by making borrowing more expensive and slowing down spending.

💡Expected Inflation

Expected inflation refers to the idea that if people anticipate that prices will rise in the future, they may take actions that actually cause inflation to occur. The video script describes this phenomenon as a self-fulfilling prophecy, where increased spending in anticipation of rising prices can lead to higher velocity of money circulation and thus inflation, even without an increase in the money supply.

Highlights

In 1923 Germany, banknotes were used to paste walls and light fires due to hyperinflation.

Zimbabwe in 2008 printed banknotes with so many zeros they were infamous, reaching 100 trillion dollars.

Inflation in Hungary in 1946 caused prices to double every 15.6 hours, leading to disastrous economic conditions.

In 2022, the USA, EU, and UK experienced a sudden rise in inflation, making it a global economic topic.

Inflation is the depreciation of currency, commonly measured by the Consumer Price Index (CPI).

USA’s CPI has increased from 29 to 296 in 60 years, indicating a tenfold increase in prices.

In 60 years, prices in China increased similarly to the USA, while other countries like Turkey saw a 9.7 million times increase.

Inflation is caused by the amount of money in circulation exceeding the size of the economy.

Central banks aim to maintain price stability and control inflation rates through monetary policy.

Inflation redistributes wealth, encouraging spending and production, which can stimulate GDP growth.

Deflation, where prices decrease, can lead to a vicious cycle of reduced spending and economic stagnation, as seen in Japan.

Hyperinflation, where the value of money plummets rapidly, can lead to economic paralysis and social unrest, as experienced in Germany post-WW1.

Central banks target an inflation rate of 2% - 3% to maintain a healthy economy.

Inflation's effect on asset prices is complex, with stock prices often negatively correlating with inflation.

Demand-pull inflation occurs when increased demand for goods or services leads to higher production and prices.

Governments can stimulate the economy and potentially cause inflation by increasing spending or providing subsidies.

The unemployment rate can indicate an economy's production capacity and potential for inflation.

Expected inflation can become a self-fulfilling prophecy, leading to increased money circulation and price rises even without additional money printing.

Central banks must manage not only the money supply but also public expectations to control inflation effectively.

Transcripts

Look

This is Germany in 1923

These people were pasting their wall using banknotes

Light up fire with banknotes

The Deustche Mark became worthless

too small to even use as toilet paper

prices doubled up every two days on average

the annual inflation rate had reached

This is Zimbabwe in 2008

They printed the infamous banknotes

can’t even count the zeros in there

this is 100 trillion Zimbabwean dollars

the price doubled up

every 24.7 hours

the annual inflation rate had reached

7.3% multiplied by 10

to the power of

108

Can you imagine that?

Well I can't

This is Hungary in 1946

prices doubled up every 15.6 hours

the annual inflation rate

We may be joking aboout it now

but at that time

it was disastrous for the local economy

In 2022, USA, EU and UK

the inflation suddenly rises,

The word, inflation

has once again become the topic of global economy

I’ve dugged up this hole multiple times

Let me help you get through it

We’ll talk about inflation in depth

while making it fun and easy

And we’ll talk about what is exactly

in the mind of government and central bank

Are you ready?

Inflation

means currency

depreciation

Inflation is actually the depreciation of currency

The most common measuring indicator is called CPI

Consumer Price Index

It measures the trend of price of

common goods and services

This is USA’s CPI

It was around 29 sixty years ago

Now it’s 296

Although this absolute number

doesn't show much significance

From the comparison you can know that

current’s price is about

10 times compared to 60 years ago

It means that 60 years ago, 1$

is equivalent to $10 now

It’s lower than what you imagine right

The inflation in China is similar

In 60 years

Australia prices increase 16 times

UK 25 times

India 88 times

Turkey 9.7 million times

As prices go up, money is worth less and less

It’s not hard to understand

But if we were to get deep into understanding inflation

first we have to look at a formula

Look at this C

Hey I’m joiking

Lin would never talk about boring formulas

Actually economists

have tonnes of formulas to describe

and explain inflation

like Keynesian, Monetarism

Neo Keynesian, blablabla

They all sounded reasonable

but non of them is proven useful long-term

This is actually one of the

amazing things about inflation

Because the way it was formed

is actually quite simple

It's nothing more than the amount of money circulating in an economy

exceeds the size of the economy

Too much money with too few goods

hence prices go up

Simple as that

but none can seem to grasp

The primary goal of central banks in every countries

Or even the sole goal of many central banks

is to maintain the stability of price

Print as much money as you want

Adjust interest rates as how you like

Just as long as the price is stable

and maintain the inflation rate

But it’s difficult to maintain

Even the Federal Reserve and the European Central Bank

where

they’ve gathered world’s renowned economists

they often disagree among themselves

So this is actually not as simple as you may think

Let’s dive deep

If we stand in the perspective of an entire economy

then money is nothing more than a mean of circulation

Currency corresponds to purchasing power

For example, it doesn’t really matter if this milk tea is $3

or $300

What we are after is

more enjoyment, more happiness

That's too deep for today

For an economy

we are chasing after higher output value

To put it simply, higher GDP

Meaning to say if everyone works hard every day

do more works, more outputs

produce more and better products and services

Then, as consumer we get to enjoy

these better products and services

So the economy as a whole operates more efficiently

This is what we are after

From the perspective of currency

how does it help us in

achieving higher output

Normally we’d think that

currency is a just a medium in an economy

so it just needs to be stable

means that if you have $100

you can buy the same items with that amount forever

Very stable

It helps the economy run

But slowly people discover that

assuming the money in our hand

is not completely constant

and that the money is our hand

is depreciating bit by bit

So although it seems very safe to hide your money

under the bed

but due to inflation

the purchasing power if your money

is slowly diminishing

This purchasing power is transferred to

the newly created money

It actually is constantly making fine adjustment

to everyone’s wealth

Can’t let you be too comfy

Gotta let you hide less money under those beds

and force you out to make more money

To produce more, spend more

Inflation is

actually a

constant redistribution of wealth

Interesting right

For example

If this year a cup of milk tea cost $20

then next year the same cup of milk tea

would cost you $21

So you see the money in hand

if not spent this year

then it’ll worth less next year

Might as well spend more now

That way people are more likely

to make instant purchases

which increases aggregate social demand

and GDP will rise

See, a pool of dead water

rejuvenated by mixing in

inflation

This is why now it’s commonly believed that

a healthy dose of inflation

is better for the whole economy

Of course as consumer

we definitely don’t like

the feeling of being forced to spend

So a lot of people list inflation

into something called

Misery Index

But overall

economists doesn’t really care about misery index

Economic growth is way more important

Alright, so what if it’s deflation?

For the same $100

the things you can buy next year will be more than this year

I would have hidden it under my bed

Your wealth would increase each year

It doesn’t sound like a misery right

sounds incredible

But the problem is

no one will want to work hard to earn more money

just lay flat at home

spend less

After all if you don’t spend

you’re actually making money

Then everyone will not spend unless when it’s necessary

In long term

it’ll enter into a very scary

vicious deflation cycle

Japan is a very classic example of this

Japan is a very classic example

Japan entered deflation

and after that they were facing credit crisis. For 30 years

no matter how the central bank tries to stimulate the economy

no matter how the government borrow money

the demand just couldn’t be stimulated

Of course there are other problems like culture and aging population

But from here you can see how

terrible deflation is

Cheaper price

is not the actual problem

It’s when everyone is not working

not earning money, no output

just layflat and doesn't spend

Enter low desire society

That's the deeper problem

We care so much about inflation

not because we care about the changes in price

It’s that the changes in price

will bring changes in demand and GDP

Of course inflation

and the redistribution of wealth cannot go overboard

For example

If this year the money under the bed can buy me 100 cups of milk tea

next year 99 cups and the year after 98 cups

Then it’s still quite okay right

Just need to keep hustling

But if it’s like in Zimbabwe

where if today I could buy 100 cups of milk tea

tomorrow 50 cups

and by next week none

Then what’s the point of working to earn money

Every two three days

Everyone's wealth get reshuffled

Working so hard to earn money

but gone just like that

I’ll definitely just lay flat

I’ll just earn enough to get by

Having money is like holding hot potatoes

spend it away as soon as you got it

because it’ll be gone soon

even if you try to save it

This situation is being called as

Hyperinflation

It's really devastating to the economy

Like Germany after WW1

A piece of bread cost 100 billion Mark

day after tomorrow it became 200 billion Mark

Under such circumstances

The financial and credit system of this economy

is completely paralysed

social productivity plummet

At that time in Germany

6 million people became unemployed in just 6 months

This led to military control of currency

political turmoil

and the rise of Hitler

Any country in history that had experienced hyperinflation

had to go through painstaking

full reformation and reignition

to slowly recover

We mentioned deflation earlier

it’s a bit like the economy is being frozen

Growth and development stop

Hyperinflation is overheated economy

which ended up in combustion

that got worse

These are all bad

We talked about

how terrible deflation and hyperinflation are

so now we are going to

go even deeper to understand

why most economists

are going after that right amount of inflation

It's just a matter of right degree

For example, central bank of USA, EU, Japan

Canada, Australia

have set the inflation target to

around 2% - 3%

Central banks of other economy bodies

although didn't announce a

specific inflation target

but similarly they wish to control

inflation between 2% to 5%

No matter what monetary policy they decided on

their main target is to control the

inflation to stay in a reasonable range

Even at the cost of

sacrificing short-term economy growth

or even enter a short-term recession

Maintaining inflation

is the bottom line for all the developed economies right now

Just a quick talk

Some people are curious about

the effect of inflation towards price of assets

What’s the effect on stock price and housing price

In theory it’s quite hard to say

Because there are many interfering factors

But if you were to guess on a direction

you might think it’s positively related

Because due to inflation, prices increase

in order to hedge against inflation

people would invest in real estate

or stock market

However in reality it’s quite interesting

Let's look at the IMF's regression

of the past relationship

between share prices and inflation in 71 countries

I’m not going to explain on this diagram

The conclusion is that

no matter it’s a developed or developing country

There is a negative correlation

between stock price performance and inflation

Meaning to say, during high inflation

stock price would fall

This is because

policy is the main reason for the fall of stock price

During high inflation period

in order to curb inflation

government and central bank would tighten up on

financial and monetary policies

And this tightening policy caused the stock price to fall

However Turkey is an exception

They didn’t tighten up policy during inflation

that’s why their stock price increase 3 times in a year

Another exception is

the stock price of energy companies

Historical data suggest that generally

during periods of high inflation

Energy stocks have done very well

This is also very much in line

with global inflation in 2022

Didn’t we awarded

best performance company

to Exxon Mobil

So why do you think inflation happens?

The most direct would be

because central bank prints money

they printed too much money

which causes inflation

Well it’s correct

but also not entirely correct

Sometimes even when the government doesn't print money, it can lead to inflation

Sometimes the government could print as much money

but won’t cause inflation

For example, for the past 20 years, Japan’s central bank

has been printing money endlessly, but still couldn’t end deflation

Let’s look at

3 factors that could cause inflation

First is demand-pull inflation

For example

imagine in a functioning economy

and then one day for some reason

everyone wanted to drink milk tea

In this economy

where everything runs as usual

but suddenly have an extra demand

Everyone go and buy milk tea

At this time

all the milk tea shop owners in the country

they get very excited

which would lead to two consequences

One is producing more milk tea

another is higher milk tea price

Regardless of which

the milk tea shop owners get the profit

The boss who made money

can now afford to buy more food, bags and whatnot

If the boss is generous

they would issue bonus, raise salary

the employees would be able to buy more food, bags and whatnot

So you see now

the businesses for selling food and bags are thriving

and then enter another cycle of

buying more goods

In conclusion

In conclusion, increase in aggregate demand

would cause a rise in production and price

The company's profit will increase

which will lead to an increase in consumption

causing a new wave of demand growth

A virtuous circle thus begin

That’s why we said that

aggregate demand will lead to economic growth

But did you notice that there’s a

side effect, that’s increase in price of goods

or so called inflation

So the entire logic is actually

demand-pull inflation

Demand really is

the productive force that drives social progress

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Let's get back to the topic

Just now we talked about demand pull inflation

it bring about economic growth right

So if the government

wishes to stimulate economy, they will start from stimulating aggregate demand

just that the side effect is inflation

What does it mean by stimulating economy

Simply put, it's to motivate people to spend money

buy milk tea, buy bags

It's either government spend money themselves

like developing infrastructure or giving out subsidy

or the simpler and easier way

like recently

the Western government is willing to

hand out money to their people

Let them buy it themselves

In the beginning of pandemic

everyone is staying at home

So who would be buying milk tea, the demand dropped

So the governments are starting to print money

This is the balance sheet of central bank of US, Europe, Japan, UK

While stimulating demand

they had to

inject large amount of money into the economy

that brought the risk of inflation

This means that inflation and economic growth

goes hand in hand

Buy one free one

Although they come hand in hand

but if you choose the right time to stimulate

you can achieve economic growth

with lower inflation

For example, now the government is handing out $1 trillion

to motivate people to buy milk tea

Assuming if the milk tea shop is idle

the ingredients are sufficient

So when the customers come, I can just make it

Very easy to fulfill the demand

doesn't really need to increase price of milk tea

only increase in GDP

Now this is nice

Conversely, if this milk tea shop

is already crowded and busy

and the government go ahead to stimulate demand

then it'll only force the price of milk tea to increase

The production didn't actually increase

The situation is worse in this case

Can you see that

the main difference in the two examples

is that whether the milk tea shop still has

production leftover

Assuming that if the economy

possess huge production capacity potential

You'll see economic growth if you throw money in

You'll even feel that no matter how much money you throw in

all you can see is economic growth

and not increase of price of goods

The economy keeps going upwards

very prosperous

So how do we look at the production capability

in an economy?

Actually you just need to look at unemployment rate

If the unemployment rate is high

that means many people are not working

so there's a lot of production capability

Conversely, if the unemployment rate is low

only 2% or 3%

that means most of the labour force

has already been put to work

In such case, the production is already quite tense

This is why in normal circumstances

before high inflation

there'll be a stage of low unemployment rate

Actualy in Keynesian there's Philip's curve

It means that between inflation and unemployment rate

is negatively related

If you look at current US

few years ago the unemployment rate was going down

Job vacancies filled

increased to more than 10 million

At the same time, companies' profitability

is at historical high in 60 years

What does it mean?

It means the company is constantly making money

at the same time it wanted to expand production to earn more money

employ more people

However, the labour force in society

has basically become saturated.

Isn’t this similar to

the one we mentioned earlier

the overcrowded milk tea shop

What to do now?

Increase price

There you go, inflation

So in such circumstances

the feds is still continuing on quantitative easing

it’s no wonder that

inflation is getting so high

Let’s diverge a little

We said that printing money can stimulate demand

and will enter the cycle of stimulated economy

and inflation

However central banks for all countries

are now facing a problem

their money that they printed are not issuable

if the central bank wanted to control currency

the policy they can make is either adjust the interest rate

or buy and sell some financial products

Actually with these methods

the money is still circling in the financial system

What does it mean

For example central bank

buys in a lot of government bond and company bond

but the financial institutions that obtained money from the sale of these bonds

They wouldn’t take out the money no matter what

nor are they lending it to real economy

they invest in stock market instead

no matter how low the interest rate is

if the commercial banks wouldn’t give out loans

then there won’t be any money flowing out to real economy

so the money would only be circling within the financial system

It’ll never reach

the hand of consumers like you and I

to buy milk tea

The central banks put lots of effort

lowering interest rates and printing money

but the actual money didn’t flow in to

the cycle of economic growth

This to some extent explain

why prior to 2020

for about 10 years

countries like Japan, Europe, USA

despite having quantitative easing

lowering interest rates for long-term

but still couldn’t get inflation in real economy

You could only see a rise in stock market

After pandemic

Biden’s government finally understand that

printing money no longer works

The government has to take action

by giving out money to consumers

literally handing out money

In 2020

almost everyone received $1200

if you have kids +$500

if you become unemployed, another $600 per month

and various loan relief measures

In 2021

those with annual income less than $75,000

received another $1400

Anyway, during these two years

a total of $5 trillion has been given out

Can you imagine that

It’s an average of

$15,000 per person

Normally the government would print money without restraint

during war

or due to political issue

I mean if the government is not desperate

they wouldn’t resort to

printing and spending its own money

We all know the consequences

it’s impossible that they didn’t know

We mentioned in the beginning

Germany from 1920 - 1923

Hungary from 1945 - 1946

lost in WW1 and WW2

and signed a lot of reparation treaty

and had to start printing their own money

When the government prints money, the quantity of money increases

so it will push demand

Then came demand-push inflation.

But because the government prints so much money

it causes inflation to rise too fast

and when it come to a certain height

the redistribution of wealth in the society will become faster

People would only think about earning enough to get by

and not think about saving money

Attention

At this point, hyperinflation hasn’t occurred yet

it’s only about 40% - 50%

even if the government realised the danger of inflation

and stop printing money

but everyone has alredy reduced their work

Then the productivity of society begins to decline

supply of goods will start to decline

What will happen because of this?

Price increase

this tells us that

because supply is insufficient

leading to cost-push inflation

which eventually leads to even higher inflation

No one is willing to work and supplies will get more scarce

again lead to higher inflation

That gives you an inflation rate of

7.5 times 10 to the power of 170

Inflation has one very important nature

I've been keeping it

and that is, expected inflation

will cause inflation

Meaning to say

Everyone think that inflation is coming

and it really is here

When I first heard of this theory

Most explain it this way

Because everyone expect the price will increase

then businesses will continue to raise price

Slowly when all the goods price increased

the bosses will start to raise your salary

then everyone will have more money on hand

and here comes the inflation

This explanation is correct in long-term

But there's a point

I couldn't understand

In an economy body

there's only so much money for so many products

It happened solely when people expect an inflation

there's no policy stimulation or printing money

The total amount of money has not changed

then why would the price go up?

Let me explain it to you

it's a bit theoretical

but I find it quite interesting

When everyone is expecting inflation

The money on hand becomes hot potato

You will increase consumption on your own

or even over consume by hoarding some goods

because the price of goods will become more expensive later

If everyone think the same

in an economy

Then the amount of time

money stays on hand

becomes shorter

This actually increase the speed of money circulation

This is to say when the market expect an inflation

the speed of money circulation increases

Even though the total amount of money is constant

but the money in circulation increases

Once the cycle starts

Even if the central bank doesn't print money

the inflation will still occur

Can you see that, expected inflation

will really cause inflation

Lin call it as

"Scare what come what" theorum

It's the same as Murphy's law

Take note that this theorum

is a very important nature of inflation

This is why

when we look at central bank trying to control inflation

not just about interest rate, quantitative easing

There is another very important point

and that is to control people's expectation

You can see from Powell, chair of Federal Reserve

whenever he makes a speech, he always seems calm

Even in 2021

when the inflation was already at 5%

He was still saying it was "transitory"

But later the inflation data goes higher and higher

he still appeared to be very calm

we are confident, we are determined

to push down the inflation

He is basically telling the market to not panic

Don't panic, I'm here, the inflation will go down, dont worry

See, once you understand

the inflation theorum

you'll know that his confidence

is part of his job

Due to this nature, no matter at which level the inflation is

Once the expectation is formed

it's very difficult to shake it

Once it goes up, it's hard to come down

and it's easy to go higher

Once people is stuck with that expectation

then deflation will sink deeper

Once you understand this

you can understand

why the central banks perceive inflation

like it's a monster

Because it panics

See here, last year US increase interest rate

at 75 points interval

This is definitely a huge blow for local demand

It presses down on the demand that

the government stimulated by handing out money

not only that it causes the US stock market to fall

Whether it's investor or consumer

their confidence is very low

Everyone is worried that the interest rate hike

will cause recession in US

But the Fed doesn't care

They continue to hike up the interest rate

After listening to the long remarkable explanation

are you finally enlightened once and for all

getting better understanding on

inflation, policy of central banks

as well as understanding on global trend

This entire logic is the underlying logic

used by central banks

when making policy

So if you plan to work in central bank in the future

watch this video again