The Magic Of Inflation Expectations

Seen on Twitter:

This gets the impact of inflation expectations on real output just right. In a country of 300 million people, even though many households are burdened by debts, many others are flush. Some firms also have large stockpiles of cash or cash-like low-yield assets. If those with cash or other cash-like assets become convinced that the purchasing power of cash will fall in the near future, then they become more likely to seek opportunities to trade cash for goods or services. If the economy is already near full employment, this increased disposition to buy things will only further push up the price level and you'll risk an inflationary spiral. But if the economy features many idle resources — unemployed workers, vacant storefronts, idle factories, etc. — then the increased disposition to buy things will mostly express itself in the form of increased real output. Some items that are objectively scarce (gasoline, e.g.) will also see price increases, but by and large if people wanted to buy more stuff, we have the ability to make it. And if people thought that the purchasing power of their money was likely to decline in the near future, they would try to trade money for stuff.