Comments
Transcript
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JA19:00 "Money Velocity isn't going to go below 1" This is an assumption, and one which I think is going to be wrong. If money is concentrated in the hands of people who do not spend it, there is no reason for velocity to go up. We are at 1.2 now, and I believe other developed markets are worse than that. I liked the interview, he made some good points. But he needs to expand his imagination about what is and isn't possible.
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VBDid someone insert the Natural Gas chart instead of the Gasoline chart around the 10min mark??
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SBMichael talks about the velocity of money being tied closely to interest rates and how when interest rates are high it encourages spending due to the opportunity loss of holding cash and the velocity of money rises. Conversely, when rates are low there is no penalty to holding cash and therefore spending drops and velocity in turn drops. I could be completely wrong but to me if feels like it should be the inverse. Would you not be encouraged to hold cash balances when you have high interest rates and be more willing to spend when rates are low due to cash being effectively yieldless due to low rates? When I look at the Fred and overlay the Fed Funds rate with the Velocity of M2 you do not see an increase in velocity during the early-80's Paul Volcker era. If anything velocity of money has dropped alongside this drop in interest rates. An expansion on this or any supporting charts/documents would be great. Thanks for the great interview, Seb
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APThis is Idiotic: Housing has grown straight along with wages. Which tower does he live in? Housing is going up because of Feds purchasing Mortgage Backed Securities. The Fed's taking the bid away from me means I will end up taking a much bigger loan.
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RAThe hedonic adjustments are a scam. According to the hedonic adjustment, the quality of magazines has gone up 100% in the last 25 years? What technology improved the technology of a magazine?
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ASA $100k house in 1980 now being worth $3.6m is a stretch. But $100k 1980 houses going for $1.5m to $2m is definitely not an outlier occurrence in the Bay Area and Los Angeles. You can find them on Zillow all the time. That’s not a criticism of the video. Just a fun anecdote.
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EBWhy do you show a historical price chart of natural gas when the narrative is about gasoline? apples and oranges!
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JJSteve is a fantastic interviewer and interprets the presentation in a very understandable way. Great job. Michael Aston offered a wealth of information on a very complicated subject.
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DLThis guy has a hard time saying things clearly and succinctly and the you add in derogative tones and giggling, hard to consider him an expert. Hardfast rule, if you cant explain things clearly and simply, you aren't an expert
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MOFantastic discussion guys. Can you please verify whether the Chapwood index is equal or a weighted index. According to their website it is weighted and not equal. My two cents on the inflation/deflation debate: So many smart people take one side or the other. I don’t think it is a binary choice. One thing everyone agrees on is that we have artificially low interest rates and an excess of borrowed money at these low interest rates. In other words, there is an unnaturally large amount of liquidity sloshing around and much of it is in the form of borrowed money where the *monthly payment* is unnaturally low. When there is an oversupply of money it is easy to see how that would be inflationary. If there is $1000 in circulation one would expect prices to be higher than if there is $100 in circulation. Just more dollars chasing the same stuff. But here’s where that simple model does not actually work in reality. In reality, that excess money actually pushes prices down if certain conditions prevail. It depends on the scarcity of the thing in question, which Michael Saylor argues eloquently, as well as who in the supply/demand chain has access to the excess liquidity. During the last 12 years since the GFC the excess liquidity has not been distributed evenly. In determining whether you will see an inflationary or deflationary result, you need to look at (1) scarcity of the thing in question (specifically whether the excess money can increase supply) and (2) where the excess money resides (exactly where in the supply or demand chain). Excess borrowed money at artificially low rates will be deflationary if the excess money is used to increase the supply of a thing more than the excess money is used to purchase the thing. Oil seems to be a pretty good example of this phenomenon. The history of shale is one of excess liquidity on the supply side and a product, oil, that is not particularly scarce. During the period that easy money was being made available to drillers, the same easy money was not made available to consumers. Drillers (supply) were borrowing at very low interest rates while SUV drivers (demand) were borrowing on credit cards. So there was and is a deflationary effect in oil prices. Excess liquidity largely caused an increased supply of a non-scarce item and the excess liquidity was not largely on the demand side. You know when oil gets really scarce? When there is not enough capital to get it out of the ground. Elite college education provides the counterexample. Unlike oil, excess liquidity does not increase the supply of elite colleges. Moreover, the marginal demand for elite colleges does not come from credit card borrowers. The system provides ample liquidity to satisfy the demand side of the equation. Rich people from other countries want their kids to go to elite colleges. So the excess liquidity in the system is inflationary because the excess liquidity does not increase supply but it does give the demand side more chips to bid up the price of that non-scarce thing. I am interested in thoughts on this. What is going to happen when the excess liquidity gets sucked out of the system?
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JTFor the Q&A, I'd be more interested in a discussion of where you expect inflation (or the lack thereof) by asset class. 1. Precious Metals 2. Base Metals 3. Energy 4. Farmland 5. Housing 6. CRE 7. Stocks - US, Developed, Emerging 8. Bonds - treasuries, investment, junk You get the idea, any asset class you think will be significantly affected from an investment framework.
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DBGreat conversation, challenged some of the things i thought about inflation. I think this is the guy you need to talk to about hyperinflation in the follow up. How does it happen? Can it happen in US/UK? How did it happen in Venezuela? Thanks
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TAOne thing I have been thinking about and would be really interested to hear someone on RV discuss (Steve & Michael would be great) is the impact of wealth disparity on inflation. If every additional dollar created is making its way to Jeff Bezos and Elon Musk, what is that money going to be spent on vs. if that dollar was circulating amongst lower/middle income folks? More dollars chasing the same amount of goods and services is what creates inflation, and once you hit a certain level of wealth you stop spending every marginal dollars you make on basic necessities like groceries and instead save and invest it. Jeff Bezos can only consume so many calories. Is it possible that asset price inflation is simply a symptom of the growing share of wealth that is owned by the top 1% and the fact that more dollars are chasing the same amount of stocks/real estate/etc.?
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rmMichael, you mentioned the difference between Japan going into deflation and the US likely not is that Japan's money growth was only 2% and the US money growth has been about 25% just this year according to M2. But, isn't the M1/2 misleading? Can't money outside of the M1/2 metrics find its way into the M1/2 metrics causing them to rise but really that money was already in circulation so it give the impression that money was created when it wasn't? Like you said, Fed creates reserves not money and can only impact the monetary base. Also, money supply doesn't take into consideration the eurodollar market where the most dollars are created and destroyed. Insight appreciated.
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JAI'm a construction contractor and I've noticed more of a decline in quality of craftsmanship, and materials quality relative to price. For example: Houses used to be built with interlocking thick planks of fairly hard wood for flooring, they had all copper piping, bathtubs and shower stalls were heavy duty metal or fiberglass, sheathing was plywood, appliances were heavy duty, and now the floors are cheap osb, the piping is plastic, bath tubs and shower stalls are acrylic, sheathing is also typically osb and appliances are flimsy. All much cheaper less durable and yet that doesn't show up in the price of a house. It's not like we are paying more over all. We're paying the same for a whole lot less.
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PK@steven would love to know the effect of inflation and deflation on Bitcoin/gold in current environment
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CUfantastic video. please more of this and can we next time add a few charts or graphs to make it all a bit more tangible. Thank you
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JLIt's a bit surprising a wide-ranging discussion of inflation does not discuss the distinctly different types of inflation. Asset price inflation is different from wage inflation, for example, which is different from goods and services inflation, whic iis different from commodity price inflation. These distinctions can matter a lot depending on the circumstances. The regime from 2009-2017 could be characterized as loose monetary policy with tight fiscal policy, for example, which is a recipe for asset price inflation with constrained wage growth. Policies that restrain wages can boost corporate profits, leading to asset price inflation, whereas policies that explicitly lead to wage price inflation (higher minimum wages etc) can have the inverse impact on asset prices (via lower corporate profits). One could also argue, clearly, that low interest rates are inflationary for asset prices — if not other types of assets — because of the way they favor long duration investments and allow valuation multiples to expand. Low interest rates can also inflate asset prices by providing cheap funding for Silicon Valley and speculative ventures (witness the SPAC boom). On another note, the description of MMT was rather unprofessional. It would be better to criticize the actual, intelligent case for MMT, than to present a cartoon version of MMT that is neither accurate nor fair. The basic premise of MMT is that, for a government with sovereign monetary policy (meaning one that issues debt in its own currency), undesirable inflation is the main policy constraint. This can include any type of undesirable inflation, in whatever form. So MMT, in realistic terms, at no point says a government can spend with abandon. Instead it says that inflation is the true policy constraint, and that undesirable inflation is thus the thing to monitor and watch out for. From that starting point, MMT believes in using creative fiscal policy to influence economic outcomes more than monetary policy. In order to prevent a regional housing bubble, for example, MMT might advise putting a cap on the size of mortgage loans linked to some multiple of annual rent equivalence. That way, if you want to pay more than a reasonable band of market value for a house, you can do so with cash but not with borrowing. Or MMT might alternatively see the benefit of adding targeted stimulus to one depressed region of an economy, but not another, and so on. The broader point is that MMT is neither crazy nor simplistic. It is actually very well thought out. You can disagree with their assumptions regarding the efficacy of government policy, but the theory understands the plumbing of how the system actually works and takes constraints seriously. It just advises focusing on undesirable forms of inflation as the real constraint, as opposed to, say, debt-to-GDP rules of thumb that aren't necessarily grounded in logical theory. It's also very ham-handed to say "Oh Japan tried MMT" and it didn't work. That's like saying you have a friend who tried the paleo diet to lose weight and it didn't work. Okay, he tried the diet. But what did he do specifically? What are the specific structural issues in Japan's economy? What did they target and what did they not? And so on. It was interesting, and refreshing, to hear him give a forecast for inflation in 2021 based on the increased quantity of the money supply and the potential for accelerating monetary velocity. But I would call this statement so simplistic as to be more wrong than right: "The main thing that drives money velocity turns out to be interest rates, and there is uncertainty and various other things, but the main thing is interest rates." Yeah, no. That isn't true. The main thing that drives monetary velocity is a desire to lend and spend — lending on the part of the banks, and spending on the part of consumers and small businesses (or the government, depending on where the spending goes). You can have a low interest rate environment where monetary velocity is high if, say, an economic recovery is underway, and animal spirits have returned, but the central bank has not yet raised rates meaningfully because they want the recovery to build a head of steam. Meanwhile, you can have a HIGH interest rate environment where monetary velocity is high if, say, it is near the tail end of a boom and a sense of euphoria reins in keeping with the bullish state of markets and the economy, at which point interest rates have been rising but animal spirits are out front. We can also play the game in reverse. Monetary velocity can be low, in an environment where interest rates are low, if some kind of financial shock has taken place and consumers and corporations are shell-shocked, or otherwise indebted and reining in their horns. Or monetary velocity can be low in an environment where interest rates are high, if, say, the impact of policy tightening from the central bank has started to work, market valuations have gotten too high, and the boom has petered out to the point where caution is creeping back in. Point being, lending and spending is what drives velocity, not interest rates. The interest rate impact is like the dog that follows its master on a leash, sometimes running ahead and sometimes running behind. Last but not least, it was good to see him push back hard on the whole dollar insolvency thing. With each passing day it becomes harder to see that scenario coming to pass. The Federal Reserve will not be shy about continuing to support the market in creative ways, and the Biden administration is about to open the floodgates. Then, too, companies with strong balance sheets will be itching to expand operations in a post-Covid environment where small business extinction has created juicy opportunities for national chains to expand, and banks will be eager to lend some of their massive reserve pile to those corprations in a new expansion phase. This is not an environment in which to expect doom and gloom related to stingy policy responses.
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FLSo interesting. Using the example of college student wages coming out of college over 30 years. I hear it. How much did it cost to go to college 30 years ago? how much does it cost today? How affordable was college 30 years ago and how affordable is it now? So if the input cost has increased hundreds of percent and the output is constant how does that get explained? thanks.
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RHI would like to hear a discussion around questions like a structurally-altered rate of savings. It is simply intuitive that trauma, economic depression, and uncertainty is likely to change psychology in a fundamental way. These are the words, in their acute senses, that I would use to describe the current situation for many if not most people, and they are relevant in a low-boil sense to the past 12 years as well. Will the US savings rate increase and converge toward that of the rest of the developed world, or to its long term average (which is several pct. points higher)? Might it even overshoot these means? If not, why not? I noticed that the personal savings rate reset structurally higher with the shock of 2008, as compared to the prior decade. Will it do so again for an extended period? Additionally, an intuitive argument can be made that the unprecedented asset price inflation will suck in more and more dollars that otherwise would be consumed, as more and more people see the ladder of economic mobility being pulled up out of their reach. These dynamics, which are largely unknown, are capable of driving future inflation numbers as much as M2 growth (especially M2 aggregated without regard to its distribution).
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API'm Sorry, CPI is indeed fraudulent. You guys have been drinking the Gov. Koolaid! In 1983, the government CPI rose roughly 12% and the government modified the CPI calculation to save money. In order to save money on salary increases and entitlement benefits, which are tied to CPI, the government changed their calculation of the CPI to reflect a much lower number. The statistic underwent another reconfiguration in 1995/96 with the Boskin Commission. These changes made the CPI an even worse indication of the real cost of living increase. It is estimated that between 1996 and 2006, this reconfiguration of the CPI saved the US government over $680 billion. Since then, the government has been artificially deflating the CPI to keep figures as low as possible. The readings you see published today no longer represent the real out of pocket expenditures incurred by most Americans. The government’s baseline CPI measure excludes items such as taxes, energy, and food; which are not only necessities, but also often a majority of our daily expenditures. The CPI increase from 2008-2012 was a total of 10.2%, but our research has found that for many cities, the cost of living increase was more than that in 2012 alone. The increase was slightly more in 2013. As an unintended conclusion, we realized that people were relying on the CPI as a benchmark to beat in order to keep up with their costs of living. In reality, if people were keeping up with CPI, they really were falling behind because the government index isn’t appropriately reflecting their cost of living increase. This is the negative result of the 30 years of CPI manipulation by the government in an effort to keep government entitlement increases to a minimum. The Chapwood Index is our attempt to help people understand why they feel like they aren’t keeping up and why, as they get older, they feel as though their money does not go as far – even when they’re following the rules, working hard and supposedly beating inflation. I go with Chapwood index over this Joker's proclaimed expertise, calling himself "nerd", indicating "expertise".
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PTVery good interview; I now understand how inflation is measured from a high level perspective and the controversies around the basket items. thanks.
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MCGreat interview. Looking forward to follow up. I recall that 80% of the $600 did make it into the economy. Which is different from what I understood you were saying. And essentially we had no inflation. Is that attributed to energy? Housing: I saw the data on rents decreasing. As someone who is looking at this regularly in my area I am not seeing this because basically there is little rental inventory available in Suburbia/Rural areas. But my thesis is that once eviction moratorium is over and forebearance is nearly over inventory increases and puts downward pressure on housing. It seems quite likely that with jobless numbers increasing we are quite possibly double dipping...wouldn't this lead to strong dollar and as well much lower CPI? MMT seems to me actually how the system works and has worked. The "MMTers" perhaps want to spend like crazy and feel debt doesn't matter... is that your issue with MMT? or is it in the description of Mechanics/Process of how the system works? Cheers.
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HFThank you for this interesting conversation (even though I haven't understood everything). I have three questions: 1) How does debt fit into the inflation narrative? If people use the stimulus to pay off debt rather than purchasing more goods or services, would that still result in inflation? Every one seems to be concerned about the increasing debt levels, but nobody seems to think that this will impact spending behaviour. 2) If the dollar keeps losing value, won't other countries at some point try to get rid of dollar-denominated credit assets? If so, would that also contribute to inflation? 3) Will inflation eventually reach an equilibrium across countries or will it stay higher / lower in certain countries? If so, how would that impact the trade relations?
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WB07:52 - Good laugh. :D
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ALPlease make this guy a regular! Let him nerd out about inflation as much as he wants, I and many others want to hear what he has to say and go to a deeper level. Thanks
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SLI looked up the paper Micheal mentioned he wrote concerning the inflation "feels like" indicator that closely tracks Gold and found it was a free download. Here is the link to this paper. https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1701806_code1526450.pdf?abstractid=1661941&mirid=1 It was not in the NABE journal he mentioned, but I located it in the SSRN journal. I have not read the entire article yet, but the synopsis tracks with what he mentioned. It would be nice to have confirmation on this for accuracy.
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GATwo guys justifying the financial repression and suppression of working people by defending the moneychangers and governments ludicrous definitions of (and narratives about) inflation. Consumer prices are a ridiculous way to measure inflation. It is a prima facie deception not to include asset prices (and labour prices) in the measurement of inflation. It is the big lie of the moneychangers and their useful idiots. This video should be titled "Everything you wanted to know about consumer prices." and NOT "Everything you wanted to know about inflation." That is the essence of the big lie.
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LJAn increasing supply of money over the growth of economy/GDP will cause inflation. However, since 2008, continuously QE/money printing did not generate inflation. The basic wage/salary is increased a bit and hightech section salary is increased a lot, there is no much wages/salaries increased in other sections. The goods/service price is little changed, or say lowered due to the technology development. No idea if there is an equilibrium for money supply, inflation, tech development and unemployment.
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dwI oversaw the development of a number of retail stores and during a growth phase hired a team 100+ people at competitive wages in relation to their position. I left the field a few years ago and recently was speaking with someone still with the company and they are paying employees the EXACT same salaries, and in some cases less, than what I paid the same employees 10 Years ago. As the dollar is certainly worth less than it was a decade ago the fact that there is ZERO wage inflation for large majority of workers in retail/hospitality jobs, really adds to the deflationary forces that are already in play. You don't need cpi inflation to increase, you just have wage inflation stagnating and after a few years you are unable to keep up with your standard of living.
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ESFollow up question: Mike's thoughts on the cause of inflation in the 1970's and early 1980's? Steve: I thought the interview was great. Very well constructed and executed.
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CDmaybe I'm a fool but after watching hundreds of videos on fed policy I never realized we didn't have a spike in M2 growth post GFC. Everyone focuses on central bank balance sheets but maybe that's irrelevant for predicting inflation, showing low m2 growth in Japan lit a lightbulb for me, bank reserves aren't money! And the recent M2 spike really does make this time different
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DSThere is much more credit today versus 1982. Credit has substituted for income. For example in 1982 in USA it was not uncommon to pay for college out of pocket. So I would not call SS boneheaded ,but it has it own problems. Government has an incentive to lowball inflation to keep promised benefit costs controllable.
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JPthe most useful and insightful piece on Macro of the last few months. A real dark horse- nearly didnt watch it.
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SLExcellent as always Steve and keep bringing him back. Smart guy Thanks!
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MHAs per normal they bastardize the term inflation and totally muddie the waters and create a complete misunderstanding of the topic!
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ABIf you are a worker you see inflation in everything, but can't do anything about it but if you are a econom specialist on inflation and live under a Rock 🥌 than shure A's hell 🤪 you can't see 🙈 lnflation !!!
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HDFrom this very helpful discussion I have the idea that we can fairly accurately determine where inflation currently is, but there was not really an indication of the accuracy of where inflation will be in the future. Is there a chart or model of world dollar creation and flow including dollar like derivatives from treasuries to eurodollars maybe weighted on their liquidity, because obviously the Fed's mandate doesn't allow it to "print" dollars and while the government spending is large I suspect, though have no idea, that it is trivial to the dollar denominated instruments that banks and non bank lending institutions create around the world. This seems to be a valid critique of the Feds operation, and that of proposed MMT, that the Fed can influence "dollar" creation and destruction, but it doesn't have control over it and it is not even clear with a quadrillion? or so dollar denominated derivatives where or with whom that control actually is located. Thus it seems that the Fed and government spending can influence the expectation of inflation, which certainly at the moment seems to have an influence in the stock market, not so much with bonds, I'm just a retired high school teacher so I would love someone with an actual understanding of the system to help clarify at least the critical elements to watch. It is obvious even to me it is not what the Fed says as there is little to no correlation to that and actual growth or inflation in the past.
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BRAs to the statement "the penalty for holding money at zero percent interest rates is zero", Doesn't this ignore inflation? If the Fed is artificially suppressing interest rates to zero and the CPI is at say 2% then the real inflation rate is -2%. In that situation the penalty for holding cash (as compared to gold) is -2% per annum.
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MQI feel that an overall inflation number, whilst great for economists and governments doesn't actually help to define actual inflation that is felt by people. Why aren't we starting to track inflation against quintile earning groups? This would provide an ability to taget inflation protection for the people it hurts the most. For example the bottom two quintiles of earners barely moving their disposable income totals in the last 50 years, whereas the cost of living has dramatically increased in that time. According to the previous Pew Research study “In fact, despite some ups and downs over the past several decades, today’s real average wage (that is, the wage after accounting for inflation) has about the same purchasing power it did 40 years ago, and what wage gains there have been have mostly flowed to the highest-paid tier of workers.” So affectively the lowest earners have experienced a greatly disproportionate amount of inflation against their increase in wages over the last 40 years. Adding even more detailed breakdown to highlight the differences there was a WSJ article that talked about “The median net worth of households in the middle 20% of income rose 4% in inflation-adjusted terms to $81,900 between 1989 and 2016, the latest available data. For households in the top 20%, median net worth more than doubled to $811,860. And for the top 1%, the increase was 178% to $11,206,000.”
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BRI liked how you discussed the price of gasoline declining then showed a chart of natural gas declining.
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HHI’m only 44 minutes left but does he talk about ACY inflation index?
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BEI found it very interesting when the guest commented on low interest rates being deflationary. Paul Volker crushed inflation with high interest rates. Can you explain the dichotomy? Thanks.
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MBI felt like he took the other side of Steve’s thesis? Which is good, but like he said we just scratched the surface. New CPI data keeps going down ?
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MJGreat interview Steve, thanks.I'm going to have to watch this again but I think Michael said 'stimuls' cheques will cause inflation / have caused inflation, partially changing my opinion. So, is it fair to say that 'stimulus' cheques will cause / is causing inflation but only in certain areas of the economy? If so, which areas, or are we already seeing this?
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METhere is a penalty for holding cash when rates are zero, and that is inflation. Even at 1.2-1.4% inflation pa, there's still a penalty for holding cash. PS. Steve, you're a nice guy but I can't believe you let your guest get away with saying multiple times that the Fed is printing money. You continually say on your YouTube channel that the Fed can't do that, right?
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CBCan you comment on the two statements below: Many inflation watchers believe that to be sustained, we need to see inflation in wages. This seems unlikely in the short run given unemployment levels, but might be an issue longer term if we continue to de-globalize and bring more manufacturing home. Companies would then compete for talent in a small population of semi-skilled workers. Government policy may play a key role in hastening this trend. Also, though the Fed has dramatically increased the money supply, many of those dollars remain trapped as bank reserves at the Fed and are not circulating in the economy. If the yield curve continues to steepen, the profit incentive for banks to lend those reserves increases as well. So perversely, higher rates may lead to more dollars circulating and in turn, more inflation pressure.
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JSPlease bring Michael back on plus tier live with live questions? Many thanks
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BHHow will inflation affect gold and gold equities ? negative or positive correlation.
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SMSVM/Guest: "The penalty for holding money at zero interest rates is zero" ... Not what I would have concluded ... don't tell RV Crypto. Completely unrelated to this comment - last week at the Cricket in Australia a player was unhappy with the umpire's decision and says - "Can I call you a bone-head?" ... the Umpire says "No"; the player says "What if I think you are a bone-head?" The umpire say's "Yes, that's OK" and the Player says "well I think you are a bonehead.".
Chapters
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What is Inflation and How is it Measured?
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Home Prices, College, and Medical Care
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Shortcomings of the Consumer Price Index
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The Chapwood Index and the Michigan Consumer Expectations Survey
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Thoughts on Money Supply Growth and Velocity of Money
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What's Next: Inflation or Deflation?
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COVID-19 and the U.S. Dollar