Inflation, Deflation & the Business Cycle

Watch

• What causes economic bubbles? - Prateek Singh ↗TED-Ed
• Why can’t prices just stay the same? ↗Vox
• How does raising interest rates control inflation? ↗The Economist
• The VOLCKER Shock | How the Fed Killed Inflation by Destroying the Economy (1979-82) ↗The Sleeping Economist
• The Recession That Will Change A Generation... (2024) ↗FinanceFrontline Today
• Why China’s Deflation Is More Dangerous Than High Inflation | WSJ ↗The Wall Street Journal

Read

• Lords of Finance: The Bankers Who Broke the World ↗A gripping narrative of the central bankers whose missteps in the interwar period laid the groundwork for the Great Depression, offering crucial lessons on deflation and financial fragility.Liaquat Ahamed
• A Monetary History of the United States, 1867-1960 ↗The definitive, if dense, account of American monetary policy, meticulously demonstrating the profound link between money supply, inflation, deflation, and the business cycle.Milton Friedman and Anna J. Schwartz
• This Time Is Different: Eight Centuries of Financial Folly ↗An exhaustive historical survey revealing the recurring patterns of financial crises, debt, and inflation across centuries and continents, challenging the notion that 'this time is different'.Carmen M. Reinhart and Kenneth S. Rogoff
• The Role of Monetary Policy ↗A seminal address arguing for stable monetary rules over discretionary policy, outlining the limits and potential pitfalls of central bank intervention in managing inflation and the business cycle.Milton Friedman
• Some Unpleasant Monetarist ArithmeticA concise, influential paper demonstrating how persistent government deficits can ultimately force central banks to inflate, even when they desire price stability.Thomas J. Sargent and Neil Wallace

Voices to follow

• Kenneth Rogoff ↗A leading authority on financial crises and sovereign debt, his analyses often illuminate the long-term implications of monetary policy on price stability.Economist, Harvard University
• Carmen Reinhart ↗Her meticulous historical research, often with Rogoff, provides crucial context on the cyclical nature of financial instability and its inflationary or deflationary consequences.Economist, Harvard Kennedy School
• Olivier Blanchard ↗His influential work on macroeconomics offers a rigorous framework for understanding the interplay between inflation, unemployment, and monetary policy, particularly in advanced economies.Senior Fellow, Peterson Institute for International Economics; former Chief Economist, IMF
• Paul Krugman ↗A Nobel laureate and prolific commentator, he offers sharp, often provocative, insights into macroeconomic policy debates, including the causes and cures of inflation and deflation.Nobel Laureate in Economics; Distinguished Professor, CUNY; Columnist, The New York Times

Glossary

• Business CycleThe business cycle describes the natural ups and downs of an economy over time, like a wave. It includes periods when the economy grows and periods when it shrinks. For example, the economy might be in an "up" part of the cycle when many people have jobs and businesses are doing well, then later enter a "down" part.
• Central BankA central bank is a country's main financial institution that manages the money supply, controls interest rates, and oversees other banks. Its goal is often to keep prices stable and the economy healthy. For example, in India, the Reserve Bank of India (RBI) is the central bank that decides how much interest banks should charge for loans.
• Cost of LivingThe cost of living is the total amount of money you need to pay for basic necessities like food, housing, transport, and other everyday expenses. When prices rise due to inflation, the cost of living goes up. For example, if your monthly grocery bill and rent increase, your cost of living has gone up.
• DeflationDeflation is the opposite of inflation; it means that prices for most goods and services are generally going down over time. This makes your money worth more, but it can also be a sign of economic problems. For example, if a new smartphone model that cost ₹50,000 last year is now selling for ₹40,000, that's a sign of deflation for that product.
• Economic ExpansionEconomic expansion is a period when the economy is growing, meaning businesses are producing more, people are spending more, and new jobs are being created. It's an "up" phase of the business cycle. For example, during an economic expansion, new companies might open, and it's easier for graduates to find jobs.
• InflationInflation means that prices for most goods and services in an economy are generally going up over time. This means your money buys less than it used to. For example, if a chocolate bar cost ₹20 last year and now costs ₹22, that's a small sign of inflation.
• Interest RateAn interest rate is the extra money you pay when you borrow money, or the extra money you earn when you save money. It's usually shown as a percentage of the original amount. For example, if you take a loan with a 10% interest rate, you'll pay back the original amount plus an extra 10% of that amount.
• Purchasing PowerPurchasing power is how much stuff you can buy with a certain amount of money. When prices go up (inflation), your money's purchasing power goes down because it buys less. For example, if you have ₹100, and the price of your favorite snack doubles, your ₹100 now has less purchasing power because you can buy fewer snacks.
• RecessionA recession is a period when the economy shrinks for a sustained time, meaning businesses produce less, people spend less, and many lose their jobs. It's a "down" phase of the business cycle. For example, during a recession, many shops might close down, and it becomes harder for people to find work.
• UnemploymentUnemployment refers to the number or percentage of people who are actively looking for work but cannot find a job. High unemployment often happens during a recession. For example, if 10 out of 100 people who want to work can't find a job, the unemployment rate is 10%.

Threads 6

Where this connects to other fields, and why it's worth knowing.

• Calculus & Rates of Change Mathematics

  When the news says 'inflation is falling,' prices are still going up, just less fast than before. People hear 'falling' and think things are getting cheaper, but that's a different thing entirely. It's like a car that's slowing down: it's still moving forward, not backing up.

• Ecosystem Tipping Points Environment

  A lake or a job market can get stuck. Even after you remove whatever knocked it over, it stays flipped, like an economy still jammed with unemployment long after the crash. To fix it you can't just undo the cause; you have to shove it way past the starting line to reset it. Scientists call this stickiness hysteresis.

• The Communication Model Media

  A price is a message: a rising number tells you something is genuinely scarce. High inflation is like static drowning that message, because when every price rockets up at once, you can't tell a real shortage from mere money-printing. The economy goes half-blind, unable to hear its own signals through the noise.

• Credentialing & the Future of School Education

  Degrees lose value the same way money does when you print too much of it. As more people earn a college degree, each one is worth less, so everyone has to chase a master's, then a PhD, just to stay in the same spot. 'Credential inflation' is basically inflation, but for the job market.

• Revolutions & Upheaval History

  The French Revolution is remembered for grand ideas about liberty, but what actually shoved the crowd into the streets was the price of bread. A failed harvest sent food costs soaring, and hungry people get dangerous fast. Big ideas lit the fuse, but empty stomachs and rising prices were the gunpowder.

• Student Debt Education

  When everyone has a college degree, each one is worth less, so you need even more schooling just to keep up. It's the same trick as printing too much money: more of it floating around makes each unit buy less. Your diploma quietly "inflates" like a currency.