The idle musings of a former military man, former computer geek, medically retired pastor and now full-time writer. Contents guaranteed to offend the politically correct and anal-retentive from time to time. My approach to life is that it should be taken with a large helping of laughter, and sufficient firepower to keep it tamed!
Tuesday, June 20, 2017
One of the simplest, easiest-to-understand descriptions of inflation I've ever read
Captain Capitalism, whom we've met in these pages before, has a new article about tuition fees. In the process of explaining why they're so high, he describes inflation in very simple, easy-to-understand terms - probably the clearest description of it that I've ever read. Anyone with even a Grade 5 or 6 education should be able to grasp it without difficulty.
If you've ever wondered why prices go up all the time, the article will answer your questions. It'll also demonstrate why the Fed's policy of quantitative easing during the recent financial crisis was so potentially dangerous. Its effects have not yet made themselves felt in full.
You'll find his article here. Go read. It's worth your time.
Peter
Useful, if overly simple.
ReplyDeleteOverly simple in that it doesn't take into account population or production growth.
But useful in that most of the inflation in college tuition does come from a similar model: more and more money chasing a fixed product. Hidden for many years by the big "everyone must go to college" push that increased the number of people attending, so that it could be spun as "more people trying to attend" rather "more money available".
But at this point essentially everyone who's got the mental ability and interest in attending college, is. As are (demonstrably, I think) those who lack both. And at least some potential students have figured out that the benefit received (in terms of employability and return on investment) doesn't match the expense. The Instapundit occasionally posts about the affect on law schools, especially the more expensive second tier schools - fewer students enrolled, and the average LSAT scores of this years class are noticeably lower than the figures a few years back.
Follow on to my last post (and more evidence to support your linked article) - Law school tuition increases 1971-2011:
ReplyDeletehttp://volokh.com/2012/06/29/law-school-tuition-over-the-last-forty-years/
Summary:
Adjusted for inflation, tuition at Ivy league schools like Harvard is about 4x as high as it was back in in the 1970s. For public, rather than private, schools the ratio is more like 5-6x.
And - adjusted for inflation - the median household income in the US is almost unchanged. It's not that people make too little money - it's that college has grown ever more expensive.
I'd have to dig to find it, but another blogger I read did an interesting take on why DEFLATION is also bad, and not a cure for Inflation. And interestingly, tied it to Dungeons and Dragons, suggesting that the fantasy world is stuck in long-term deflation, which is why it was better to stick gold in a dungeon and hire monsters to guard it than try to put that money to work. (Basically, anything you invest in will love value over time in a contracting, deflationary economy).
ReplyDeleteLOSE not love. No edit button!
ReplyDeleteIts effects [Fed's policy of QE ] have not yet made themselves felt in full.
ReplyDeleteDon't forget that the Fed policy was in the face of massive deflation - a result of the financial crisis.
Normally a little deflation can be a good thing, but the deflation that usually happens after a credit boom is precipitous and painful.
Bath house Barry didn't (a) understand jack about it, (b) definitely didn't want bad stuff happening on his watch.
Good comments from all.
ReplyDeleteI was not worried about Quantitative Easing causing inflation because all of the money printed by the Fed to buy Treasuries and Mortgage Backed Securities was credited to the banks' accounts at the Federal Reserves. Throughout Quantitative Easing you could see the total Excess Reserves on deposit at the Fed roughly equal the total Quantitative Easing that had taken place.
The printed money was sequestered in interest-paying accounts at the Fed and never got into the country's economy. Excess Reserves finally started declining in August 2014.
The biggest consequence of Quantitative Easing will be when the Fed stops reinvesting the proceeds from maturing assets. That will be draining money out of the system and that is DEFLATIONARY. So far the Fed keeps postponing that moment and promising that there will be a cap [ceiling] on the amounts they'll be draining out of the system.
"How come you didn't go to college? (And are working _here_?)"
ReplyDelete"Who says I didn't? I have TWO degrees (and I'm STILL working _here_)."
The problem with the article's example is that the author is describing a situation with a fixed supply and increased demand.
ReplyDeleteIn the real world that situation never lasts for long. As demand increases so too will production, and where possible cheaper alternatives to the product will become available.
With the American education system the real problem is that they are offering a degraded product at an ever increasing price and trying to justify it by restricting availability. Tuition keeps getting higher, non STEM degrees no longer have the value they once did, and so the value of the product is diminished.
We are at most a few short years from the collapse of many if not most of our traditional institutions of higher education. Their product is simply no longer worth the cost. People who need a full time job will enter into skilled trades, or get the bulk of their education on-line and depend increasingly on professional certifications in lieu of a pricey yet more and more irrelevant degree.