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I’ll certainly agree with you in one place: Elon Musk, along with essentially everyone else expressing an opinion on inflation, has a lot of unearned confidence. Macroeconomics, and inflation specifically, is an area that brings out a lot of people fitting lines to past data and absolutely sure of causality. In reality, there is a wide range of opinions in macroeconomics on the relationship between fiscal and monetary theory and price levels, all held by PhDs genuinely trying to figure out what's going on. All those people in 2021 calling inflation “transitory” genuinely had thought hard about their predictions and genuinely were wrong. See Figure 1 here, where traders with money on the line completely missed their bets on CPI paths.
I’ll take a moment to share my personal hobby horse, John Cochrane’s fiscal theory of the price level. It predicts that inflation is caused when people expect the government to repay its debt by printing money in the future instead of responsibly running a fiscal surplus. Deficits in response to crisis are fine as long as you can credibly pay them back, but our recent government has shown absolutely no plans to do so. Regarding valid expertise, Cochrane pleasantly obliges by providing media anywhere from engaging (Podcasts! Sound effects!) to unintelligible without an econ degree (Calculus¡ Terrifying¡).
At least on this topic, I don’t think Musk is worse than anyone else. Everybody (including me) wants to say they have a handle of what causes inflation; we probably don’t, and will get to partake in the classic human experience of being completely wrong about the future of the macroeconomy.
Smart people are best able to rationalize away their personal biases, or cloak their disingenuous wishcasting in plausible-sounding theoreticals. Assuming good faith in all cases is naive, as is assuming that good faith isn't polluted by, e.g. political incentives.
On the other hand he's talking about monetary incentive. These people thought interest rates were going to drop by 2023 and staked their money on it.
Bad faith would have been talking publicly about how inflation is temporary/imaginary while dumping overpriced 5yr bonds, like the Vox staff stockpiling n95 masks.
(Actually I'm terrible with bonds, what's the strategy for profiting on rising rates with them? Treasury futures? Can you exploit a too-low TIPS spread when rates are rising? I have no clue)
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Between the end of 2019 and the end of 2023, the money supply M2 grew 40%. The economy grew 19%. There was no reason to believe there was some long-term change in the velocity of money. Just from these numbers alone you can expect about 18% inflation. And, sure enough, the price level increased by about 20%.
You can repeat this for other countries. The UK money supply M2 grew 24%. The economy did not grow at all. Expectation: 24% increase in price level. Reality: 24% increase in price level.
Denying that increasing the money supply as was done in 2020 would cause inflation, or that it would be "transitory", comes from the same motivated reasoning that applied to the entire era of covid policy. Criticizing a heavy-handed response made you persona non grata in professional circles, so you didn't. As for placing bets on it to make money, the risk is not the existing consequences of government policy, but that you're betting on how deranged your local government is. Inflation is not the only consideration in such a circumstance, so it's no surprise that even people putting their money where there mouth is were bad sources of predictions.
I think there's a bit of a talking-past-each-other thing with "transitory" inflation. The pro-transitory argument is we pumped a ton of money into the system during covid, but then we stopped pumping money in at that elevated rate, so once all the price gains from that bump in the money supply bubble through the economy we go back to the same moderate inflation rate we had before. And that case is basically true and has been borne out.
The anti-transitory argument is hey we got this massive jump in prices and then the prices never went back down. Which is also true. Of course, that's not strictly speaking an inflation problem anymore. Now it's a cost of living issue.
The assumption that once the price rises slowed down everyone would be happy again was the problem. Absolute levels matter as well as the rate of change!
To be clear we aren’t back to normal. We have hovered about a fifty percent above the recent norm.
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Yeah that's fair. I'll concede the point, I guess I was forgetting how strong the "transitory" claims were.
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One set of people got the non-transitory nature right without using any sophisticated modeling or "genuinely trying to figure out what's going on". The other set got it wrong while using sophisticated modeling and "genuinely trying to figure out what's going on". This did not lead me to conclude that causes of inflation post-2020 were hopelessly complex, but that people exercised motivated reasoning and recruited a bunch of pointless complexity rather than just acknowledge the obvious conclusion in front of them.
The whole thing feels like the midwit meme brought to life.
You're claiming that the traders mentioned in the previous post were giving away money? If so, could you elaborate on what you think the cause of error was, since I rather like it when non-me people distribute free cash.
The error is motivated reasoning due to being unwilling to criticize heavy-handed covid-excused policy. The downside is that this is hard to cash in on because it's not a bet on just inflation, but also on how deranged the government is - predicting higher inflation also means predicting a more insane government, which reduces the value of any rewards of predicting correctly.
For the sake of example to illustrate that government insanity matters for economic bets, consider 2 people betting on whether the government will rob them and take half their money. The actual chance of this happening is 50%. But if the bet is even, the payoff matrix looks like this: https://i.imgur.com/HQ1PibN.png. Therefore it's actually beneficial to bet that the government will do nothing.
Edit: It now occurs to me that this might be a novel contribution to game theory and therefore is a bit too much of a reach to be a point of evidence here.
Maybe to economics or betting but surely not game theory
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In Physics 101, there's a class of problems where there are multiple ways to figure out the answer. One is through difficult integration of force and velocity equations. The other is noting that energy is conserved and you can figure it out through simple algebra that way. There's another class of problems where one thing absolutely dominates -- one hard SF author posed the problem in a short story about a spaceship moving through the solar system at 0.25g constant acceleration. Yes, it's a ridiculously multi-body problem, but you can basically ignore all the smaller influences because 0.25g swamps them.
These economic questions tend to be like those problems. Yes, there's a way to make it complicated, but there's also a simple "energy" (money supply/spending) argument. And yes, there's a bunch of other factors, but when you throw around trillions of dollars, they're swamped.
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