Understanding Finance from scratch

Chapter 40 In the past, a house could be bought, but today it is only worth a bottle of wine—Finance to be concerned about inflation (3)
This approach may seem extreme, but the Austrians believed that a process of competition would find the best currency.These absolute liberals insist that the essence of currency denationalization is to deprive the country of the right to mint coins, and turn this mint right to financial institutions under the constraints of the market, so as to completely eliminate the possibility of the country from the globalization of financial capital. influence on world economy and politics.

Fourth, return to the gold standard system.While the modern financial system creates credit through partial reserves, it will inevitably create inflation. Therefore, another method proposed by the Austrian school is to return to the gold standard system.This approach advocates the restoration of the gold standard in the United States before 1933, that is, the value of the US dollar is determined by law to contain a certain amount of gold, the government mints gold coins for circulation, and all banknotes and bank deposits can be exchanged for gold coins at will.

The advantage of the gold standard system is that it does not rely on any form of government means to achieve the balance of currency circulation. The problem it brings is that while trying to achieve a country's balance of payments, it ignores the impact of this balance on the domestic economy. damage.

Advocates argued that the threat of cashing in gold discouraged fraud by the possibility of government or private banks committing fraud.Returning to the gold standard would give the Federal Reserve Board a basis for controlling the quantity of money and would limit the Board's power to manage money.The more important significance of the gold standard system is that only by returning the US dollar to the gold standard system can people's bullish psychology be eliminated, people's confidence in the US dollar can be enhanced, price stability can be guaranteed, and interest rates can be reduced.But unless there is a return to the classical gold standard with a realistic gold price, the international monetary system will swing back and forth between fixed and floating exchange rates, each with a bunch of unresolvable problems, and then malfunction until it breaks down.

CPI is not exactly equal to inflation
Mr. Ma is a private entrepreneur in the textile-related industry. Recently, due to rising wages, it is difficult to find suitable workers. He intentionally reduced his business volume and invested 300 million yuan in the stock market.His theory is that the CPI has been rising recently, and inflation is coming soon. He only needs to catch one or two daily limits to resist inflation.Previously, he only bought fixed-income financial products with low risks that could be ignored.

Another Mr. Hu did not have such a big budget, but he still managed to scrape together 60 yuan, most of which were invested in gold to preserve its value.

There are many more customers, as soon as they arrive at the bank, they anxiously ask the financial planner, "What should I do, the money is worthless, should I buy a house or stocks, or buy some gold?" It will turn into paper in no time...

Are these people too anxious, or is inflation really coming? Does rising CPI mean that inflation has started?
I have already mentioned the impact of CPI rise on the economy, because CPI is the most sensitive indicator in economic operation-its rise and fall are directly related to social and people's livelihood.But please note that although CPI can be regarded as a weathervane of inflation, its rise and fall will become the yardstick for the initial judgment of inflation, but the increase of CPI cannot be simply equated with inflation.

We know that CPI is usually one of the important measurement standards for countries around the world to judge whether there is inflation, but the judgment standards of countries are not consistent.Generally speaking, when the CPI continues to rise generally, such as half a year or more than a year, and the variety of the increase reaches more than 1%, and the increase of the CPI is greater than about 60%, inflation may occur, and the country will follow one after another. Introduce some tightening or tight fiscal and monetary policies.Conversely, when the increase in CPI is less than about 3%, deflation may occur, and the country will introduce some active or expansionary fiscal and monetary policies.In a relatively benign operating state, the increase in CPI is controlled at 0.5% to 0.5%.

Therefore, many of the concepts we usually recognize as "CPI=inflation" are wrong.In fact, from the meaning of the word inflation itself, we can see that the so-called currency means money. Inflation has no other meaning. It means that the money supply has increased.The rise in commodity prices, including daily consumer prices, housing prices, stock prices, raw material prices, labor wages and other asset prices, is simply the result of more and more money competing to buy these goods and services.

Another point is that we mentioned earlier that during the calculation of CPI, goods and services are classified, and representative goods are selected from them, and their price fluctuations are weighted and averaged.Therefore, the price fluctuation of a commodity with a large weight has a greater effect on the fluctuation of the CPI, and the effect of a commodity with a small weight is small.In this way, the following situation may occur: the prices of many goods and services with small weights are falling slightly, while the prices of one or two goods and services with heavy weights are rising sharply, which eventually leads to an increase in CPI.Then, at this time, based on the positive increase in CPI, it is impossible to conclude that the prices of goods and services in society are generally rising, so it cannot be concluded that inflation is occurring in the economy based on a positive increase in CPI.This is similar to the situation in which the decline or rise of certain heavyweight stocks in the stock market leads to the decline or rise of the stock market index.

The CPI index tends to overestimate inflation.If we want to compare price levels in 2010 to 2000, we must somehow compare the price of a computer today with the price of a printer 10 years ago.Since computers are more expensive than printers, the advent of these new items tends to make the CPI greater than inflation.Many items such as automobiles and CDs are getting better year by year. Part of the price increase of these items is the payment for quality improvement rather than inflation, and the CPI counts price increases as inflation. Therefore, there is another view now that, Does paying attention to the CPI index mean that inflation should pay more attention to the core CPI.The so-called core CPI is generally measured by deducting some items whose prices are easily fluctuated by the overall inflation index. The deducted items usually include food, energy, indirect taxes, and housing mortgage loan costs (generally expressed in housing mortgage interest rates), etc. The most common ones are food and energy.In this case, there will be no serious inflation if there is no joint increase in the prices of industrial consumer goods and services.The data shows that while the CPI has continued to rise sharply, the core CPI has remained stable at around 1%.

In any case, too much increase in CPI is a serious harm to people's livelihood.Whether it is a real "wolf is coming" or a fake "wolf is coming", as ordinary individuals, we can only remind ourselves to be mentally alert and make reasonable investments to resist the pressure of rising prices.

Anti-inflation fighters: The rise and fall of inflation

In the 20s, the United States entered a stage of stagflation. In 70, Paul Volcker stepped in and was appointed as the chairman of the Federal Reserve.With integrity, extraordinary courage and professional wisdom, he withstood the pressure from all sides, successfully subdued the double-digit inflation, and laid the foundation for the steady growth of the US economy for more than 1979 years. It also rewrites the traditional pattern that the economic cycle occurs every few years in the United States.

According to Nobel-winning economist Joseph Stiglitz, Volcker was actually the most hated person on Wall Street because of his reluctance to strongly support President Reagan's deregulatory policies.Since it was not tolerated by the plutocrats, Volker naturally couldn't make a lot of money, so his life was relatively poor. Volker, in his 80s, still takes the subway when he goes out in New York.He himself doesn't seem to care, and has always been calm and composed.Volcker's family is in New York. When he went to Washington to serve as the chairman of the Federal Reserve, he rented a house with only one bedroom and one living room, which was as small as a student dormitory.Volker had been taking care of his sick wife for a long time. After his wife died 10 years ago, he just remarried, and he was only engaged, and the wedding has yet to be held.He didn't go to the beautiful girl in the Mood for Love either, but spent his old age with one of his female assistants.

So how did Volcker curb inflation?

The 20s were a time of economic chaos.The decade began as policymakers sought to reduce inflation left over from the 70s.President Nixon imposed temporary controls on wages and prices, while the Federal Reserve's tight monetary policy caused a recession with only a small drop in inflation.The effects of the controls ended when wage and price controls were removed, and the recession was too small to offset the inflationary effects of the previous boom.By 10, the unemployment rate was the same as it had been 60 years earlier, while inflation was 1972 percentage points higher.

在1973年年初，决策者不得不应付石油输出国组织（欧佩克）所引起的大规模供给冲击。欧佩克70年代中期第一次提高油价，使通货膨胀率上升到10%左右。这种不利的供给冲击与暂时的紧缩性货币政策是引起1975年衰退的因素。衰退期间的高失业降低了一些通货膨胀，但欧佩克进一步提高油价又使20世纪70年代后期通货膨胀上升。

整个20世纪80年代是美国经济政策发生根本性变化的时代。这些变化受以下因素的影响：80年代初始的经济条件、罗纳德·里根总统的风格和政治哲学以及经济学家和行政官员中新的社会思潮倾向。70年代末惊人的高通货膨胀率和迅速增长的个人税赋以及六70年代庞大的政府支出，已引起公众普遍的不满。罗纳德·里根1980年当选为总统反映了这样一种公众情绪，人们期待新总统降低通货膨胀、降低税率以及削弱政府对经济的干预。

It was in this situation that Walker was ordered in the face of danger and stepped onto the stage of American history. In 1979, Volcker became the chairman of the Federal Reserve and strongly raised the US dollar interest rate.The strong dollar policy with high interest rates has attracted a large amount of foreign capital to flow into the United States, pushing the United States into the era of a strong dollar.In the first few years before Volcker took charge of the Fed, inflation reached 13.5% (1981) due to the collapse of the Bretton Woods system, and Volcker managed to reduce it to 3.2% (1983).

How did he do it? In 1979, the federal funds rate (federal funds rate, the interbank lending rate in the United States) was 11.2%. In 1981, Volcker raised it to 20%, and the bank's benchmark interest rate rose to 21.5%.But soaring interest rates hurt U.S. agriculture so badly that angry farmers drove tractors into Washington neighborhoods and blocked the gates of the Eccles Building, home of the Federal Reserve.

Although it was costly, Volcker's policy proved so successful that after three years inflation was contained, bringing it down to 1983 percent in the United States by 3.2 and keeping it low thereafter level.Most importantly, even during the 1982 recession, the Fed stuck with high interest rates, a practice that raised rates aggressively when inflation threatened and cut them when inflation was more benign.

However, Volcker is most criticized for his tight monetary policy.Because of this policy, the unemployment rate in the United States was close to the great economic crisis in the 20s, and it fell into an economic recession, which did not change fundamentally until the Reagan era.However, since then, the U.S. economy has experienced an unprecedented 30 consecutive years of high growth, which fully proves the effectiveness of its policies.

According to our imagination, after Volcker stepped down from the position of the Federal Reserve, there will be many vacancies, but after resigning, Volcker spent most of his time in a state of unemployment, because it was an era when Greenspan and other conservatives were proud.After Obama came to power, for the sake of balance, Volcker was reappointed, but he was still given a idle job, and Volcker was still refrigerated most of the time.

After Volcker left the Fed, he took on the difficult task of chairing a Jewish group and a joint committee of Swiss banks to help resolve the problem of unclaimed bank accounts of Holocaust victims.He often faced emotional and tense situations, a situation with a high probability of failure.However, Volcker stepped in and oversaw a massive audit of Swiss bank records, forcing the bank to sign a compensation agreement worth $12.5 billion.

It is worth mentioning that Volcker is also a friend of the Chinese people.Whether during his tenure as chairman of the Federal Reserve or after leaving office, Volcker paid close attention to and enthusiastically supported China's financial reform and opening up.He has visited China many times and expressed his views to the Chinese government on major issues in financial reform.

(End of this chapter)