Lots of New Money, But Still-Low Inflation. What Gives?

By Richard M. Salsman . He is a Senior Fellow at the American Institute for Economic Research. This is a great, very detailed article. It seems like the main point is that the velocity of money is not high enough to create much inflation even though the money supply has increased so much. So that means that aggregate demand for all goods and services is not strong enough to raise prices because people are holding money

Excerpt:

"the money supply (M-1) has increased substantially over the past year (+350%), to $18.4 trillion, although most of that occurred in 2Q2020. But the demand for money (cash balances) also has risen a lot, which means money’s velocity (rate of speed in spending) has been plummeting. Whereas velocity is the multiple of nominal GDP to the money supply, money demand is the inverse (the multiple of money supply to nominal GDP, or the reciprocal of velocity). Fast-rising money demand (fast-declining velocity) signifies hoarding.  

Banks, businesses, and households tend not to hoard money in good times, or when they have confidence in the credibility and predictability of policymakers; they hoard in bad times, when they lack sufficient confidence. That is precisely the case today"

Psychologist uses money in experiments to study how gossip can be useful

By Mandy Brownholtz of The NY Times. Excerpts:

"gossip helped early Homo sapiens form larger and more stable bands."

"idea from the anthropologist Robin Dunbar, who theorized in his 1998 book “Grooming, Gossip, and the Evolution of Language” that language — and by extension, gossip — replaced grooming, a social bonding practice still seen among our primate cousins.

In other words, humans needed something that would help them keep up-to-date with friends and family as they spread out across distances, and networks of Homo sapiens were becoming too large for everyone to effectively groom everyone else.

Or, to put it another way, humans evolved to gossip."

"Gossip’s ability to drive “vicarious learning” and facilitate “social connection” was the subject of a recent study by scientists at Dartmouth’s Computational Social Affective Neuroscience Laboratory, published in April.

"Luke Chang, an assistant professor of psychological and brain sciences and director at the lab, explained that he and his co-researcher, Eshin Jolly, dug into the topic because gossip is ubiquitous but not well-studied. (They define gossip as communication about social topics involving self-disclosure and discussions about others.)"

"He and Mr. Jolly, a postdoctoral researcher, created a game where individuals received small amounts of money and were divided into groups of six. Each round, an individual could choose to keep the money or put it into a pot, benefiting everyone. To replicate the societal pressures of gossip, they gave the players the option to exchange private communications, which inevitably turned into a way for people to size up who was hoarding or who was contributing. “It’s like being in a neighborhood where everybody is affected by everyone else’s actions, but you don’t get to actually see what people are doing all the time,” Mr. Jolly said. “We tend to find that in certain circumstances where you can’t see what everybody’s doing, the discussions we have tend to be more about what other people are doing.”

"What made this gossip useful — and not just fun and petty — was that it allowed a group of people to get on the same page organically. It facilitated learning from others without direct observation. It helped strangers build connections. It increased cooperation by aligning individuals on acceptable behavior.

“Our work suggests that there’s a lot more richness there than we’re willing to think about,” Mr. Jolly said. “When I’m talking with you about somebody, or something I saw, even if it’s negative or positive, it’s this idea that we’ve decided to temperature check how we feel about the social world at large. ‘So and so did this, so what does that mean? Do you think it’s OK too?’”"

"there are also OK ways to gossip. One of those is gossiping about celebrities, or powerful people that you don’t know."

"Mr. Jolly and Mr. Chang determined in their study that gossip’s beneficial societal function comes from its ability to make things clearer and to help people better understand their environment. If you are actively sabotaging that, don’t pass it on."

Strong U.S. Economy, Stimulus Spurs Migrants to Send Billions of Dollars Home

Global remittances to low- and middle-income economies fell 1.6% in 2020, defying expectations of a sharper drop

By Eun-Young Jeong of The WSJ. Excerpts:

"Foreign-born workers sent more than $500 billion back to their home countries in the developing world last year, as the economic recovery and generous government programs in areas such as the U.S. helped sustain a critical lifeline for poor nations still battling the Covid-19 pandemic.

According to fresh data from the World Bank, global remittances to low- and middle-income economies fell just 1.6% last year to $540 billion, defying expectations that the pandemic would squeeze overseas workers’ ability to earn and send money to relatives in their home countries."

"Foreign direct investment in medium- or low-income countries fell 30% last year, excluding China, the world’s top destination for FDI.

During the pandemic, stimulus payments and enhanced unemployment and furlough programs in the U.S. and Europe allowed foreign-born workers there to continue to work and cushioned the fall in their incomes. Moreover, many migrants work in key industries such as delivery services and healthcare that continued to operate last year."

"Remittances make up over a fifth of the gross domestic product in countries such as Lebanon, Nepal and Jamaica."

"In the Philippines, where remittances make up over 7% of its GDP, payments from abroad are forecast to have reached $2.5 billion just for the month of March, a 4.8% rise from the previous year"

"In Mexico, remittances reached $4.15 billion in March, the highest amount ever sent from the U.S. to Mexico by migrant workers in a given month and up 2.6% from the same period last year"

Inflation Doesn’t Have to Mean High Interest Rates

Issues like the semiconductor shortage are pushing up prices. Investing in production can be a better way to deal with inflation than interest-rate rises.

By Jon Sindreu of The WSJ. 

From 2012-2020, the highest annual inflation rate was 2.3% and in six of those years it was under 2%. But from April 2020-April 2021, the consumer price index was up 4.2%.

First, why might we expect that inflation might lead to higher interest rates?

One reason is that the expected rate of inflation will affect the nominal interest rate.

Nominal interest rate = real interest rate + expected rate of inflation + (real interest rate)*(expected rate of inflation)

The real interest rate is the rate you would charge on a loan in a world with no inflation. You add the rate of inflation since you don't want to lose out due to inflation when you get paid back.

The last term, (real interest rate)*(expected rate of inflation), is also necessary to make sure the lender does not lose to inflation.

So if you lend $100, to be paid back one year from now and you want to charge a10% real interest rate, in a world with an annual inflation rate of 10%, you actually need to charge 21%, not just 20%.

You might think that you would get the 10% real rate and the extra 10% compensates you for inflation. But not quite.

You need to get paid back $110 just to keep up with inflation. Then you had wanted to make a 10% real return on top of that. What is 10% higher than 110? 121. And 121 is 21% higher than 100, the amount you loaned.

So here is the calculation

.21 = .10 + .10 +(.10)*(.10) = .10 + .10 +  .01 = .21

The article hints that our somewhat high inflation rates won't last long. If that is the case, then lenders will not be adding much to the real interest rate to get the nominal interest rate.

The other reason why we might think interest rates will rise due to inflation is that the Fed might raise them to reduce aggregate demand (AD). Too much aggregate demand will give us high inflation rates. Again, if it is true that we are only going to have a temporary increase in the inflation rate, the Fed won't need to do this.

The graph below shows how too much AD brings big price increases.

If we are at AD2 (so we have the full-employment GDP) and AD increases (like to AD3), then we start getting larger increases in prices (higher inflation). A higher interest rate will reduce or keep AD constant to prevent this inflation. But again, if the current high inflation is temporary, then the Fed will not need to raise interest rates.

Excerpt from the article:

"Inflation is back. The U.S. consumer-price index surged to a 13-year high of 4.2% in April, official data showed Wednesday. The eurozone’s figure is a weaker 1.6%, but still a two-year high. The global bond market isn’t panicking yet. The pandemic led many distressed companies to slash prices in 2020. Investors always knew that, as the economy reopened, some year-over-year increases would be huge.

The prices of most products haven’t changed much. CPI gyrations are mostly down to a few items particularly affected by lockdowns and travel restrictions, such as airfares and restaurant prices, as well as commodities. Excluding food and energy, U.S. inflation in April was just 3%.

One inflation driver stood out in Wednesday’s data: The global shortage of semiconductors. Partly because it is impairing production of new cars, the prices of used autos jumped 10% in April from the previous month—accounting for over a third of the all-items increase."