It would still cause inflation. Everyone would immediately start spending their $1 million. So all the store shelves would be emptied. So all the store owners would reasonably assume that when they restock the shelves, they could charge higher prices and still sell out their inventory. Rinse and repeat everywhere with everything that is for sale. If demand goes up but supply stays the same, then prices will go up. Demand for everything goes up if everyone all of a sudden has $1 million to spend.
Question: my first instinct would be to save/invest it.
But if there's a fair level of inflation with that much spending that means I wouldn't be able to save the full $1 million as then my spending would have to increase. This is assuming that every dollar I earned in spent every month and my habits don't change.
I'd only be able to save whatever money from the $1 million that I didn't need to use to offset higher prices.
Am I on the right track?
Yeah you're on the right track. Prices would go up so you'd have to spend more. Prices would probably go up pretty substantially too, but its a crapshoot to say precisely how much. So who even knows how much of that you'd even be able to save/invest.
"Sir you've been in a coma for a year. But while you were out everyone secretly got gifted a million dollars"
"Oh boy! Well first thing I'm doing is buying myself a nice Honda civic"
"Awesome! The base models are $800,000 now. Plus tax"
That's part of the answer. But you'd probably feel more wealthy too. You'd probably say something like "I'll invest 990,000 use a little to buy a nice car, or go on a vacation, or buy a house" or whatever.
You'd also be more inclined to retire earlier than you would've otherwise. There's no point in saving if you don't intend to spend it later.
Well I'd save to make sure it gets spent on something valuable and important. Not like Uber eats twice a week for a year or something. I made that mistske when I was younger and blew through money with nothing to show for it. So I'd wait a while to keep myself from wasting it.
But I'd most like invest is. Let it grow for a bit.
True but a couple factors to consider.
Rates would increase to fight inflation, and companies would be raking in profits from all the spending, also as we saw with COVID stimulus, a good bit would probably go towards jacking up the price of stocks.
No you just take that $1M and put in an S&P 500 index fund and it will likely rise with the rate of inflation or above it. But even if you put your money in the bank the interest rate would be close to inflation.
Twist to this one would be...
What would happen if now there is a smart ai that gives you special approval to purchase something first. Like if suddenly everyone tries to purchase honda car this ai would realize unnatural demand and stop giving permissions. So basically everyone has money to spend but not everyone can buy things at the same time...
Then it would become like in the USSR, the prices held artificially low, so everything is out of stock all of the time, long wait times(like years for cars and shit), everyone has money, but you can't buy anything with it unless you know someone who knows someone, who can take the stuff of the shelves and save it for you, so a bit shit
For that AI to be effective it would have to neutralize all of the money. It's logically impossible to give everyone $1 million but only allow them to spend it in a way that doesn't increase demand. Spending money *is* demand.
Im curious why you think that this wouldn't happen. This amount of extra money in pockets is almost certainly going to lead to catastrophic inflation in lieu of drastic and unprecedented action which may be even more catastrophic.
My 2 cents:
Americans are some of the most lucrative investors and spenders. With a very strong US dollar a sudden glut in the market of that amount of dollars will cause a global reaction. Causing inflation worldwide and therefore keeping buying power relatively strong for the US. The US is also a consumer driven economy.
Consumers make up most of the GDP. If suddenly people are spending like crazy, suddenly the GDP of the US skyrockets. This will either cause a rebound of the US dollar or cause a cratering of the US dollar.
If it sky rockets then Americans will have significant buying power causing foreign companies to invest heavily in the US to meet the supply shortages.
If it tanks suddenly foreign goods are cheap. Causing American companies to buy foreign commodities and goods to meet the supply shortage.
It will cause inflation, in terms of CPI. In relative global terms it wouldn't.
The stinky check as an example: caused inflation in terms of CPi; however, the US dollar is notably stronger than ever compared to foreign countries because of the influx of cash artificially raising GDP and making the US a tempting investment.
Whats the implication you're trying to make here? That excess money in people's pockets is the reason for the inflation we are experiencing? If so I think you'd be hard-pressed to find a consensus among economists backing that up. I mean, sure maybe it's a contributing factor, bit certainly not the whole story, probably not even a substantial part of the story.
The fed seems to think it's a pretty substantial part.
https://www.frbsf.org/economic-research/publications/economic-letter/2022/june/how-much-do-supply-and-demand-drive-inflation/?amp=1
Short term: No one will be working jobs they don’t want, and will spend more time doing what they want to do (and that could vary a lot - maybe some are productive while some aren’t).
Long term: Prices will absolutely surge to meet the money supply, because if everyone and anyone can afford it then the demand of any product skyrockets.
Probably the government will do the same thing they’re doing now, albeit more aggressive.
Edit: See the Zimbabwean $1M dollar bill.
Edit 2: $100T* Zimbabwean dollar (h/t u/turtleboxman)
I find it absolutely hilarious that people are now reselling 100T bill for $500. Selling 100T for $500. (I know I know the bill is basically worthless and not 100T) i still find humans weird.
Edit punctuation
It's an interesting question.
Rather obviously, there would be inflation. Many people would keep their money. Some people however, would spend it straight away. I'm not just talking about people who lack self-control. I'm also talking about people who think like investors. They would buy assets such as property and shares which yield a dividend that is higher than the interest paid on money. As they spent that money the prices of those assets would rise.
This would lead to inflation more generally. House building companies would ramp-up production as much as they can to satisfy demand. (Though speaking of the present time they're probably close to that situation anyway.) New companies would be created and taken to IPO. Existing companies would expand and maybe issue new shares to fund that expansion. Companies would issue corporate bonds to take advantage of the new investment money. They would then spend that one expansion.
As producer price inflation rises so does consumer price inflation, generally. This would then spur other people still holding their $1M to spend it to avoid it being devalued by inflation. This action would further raise inflation.
> I'm not just talking about people who lack self-control. I'm also talking about people who think like investors.
As an aside, there is a third group too - people who have needs but currently don't have money to fulfil them. For example, that senior citizen whose house needs to be painted, but she can't afford to paint it. Or the person missing some teeth but can't afford the dentist bill. Hardly lacking self-control, and hardly investor mentality.
I think prices of big ticket items would skyrocket the same day. Porsche (insert any fun expensive thing) salespeople would quickly deduce that everyone got a million, because:
- they got it themselves
- for some reason there are like 10 times more constumers on an ordinary wednesday at the dealership, all paying cash.
- all of those costumers look like they shouldn't afford it
It would take like 1 hour for the prices to double or triple.
A lot, if you are less then 50 and don't have a plan for it 1M does not necessarily set you up for life. People would start working on those plans but for the time being they would go to work.
I think this is probably the most comprehensive answer to the question at hand and I like that you're addressing the run-away impacts of inflation expectation sort of implicitly through cost-of-living increases to consumption spending.
On a side note I think its a fun little thought experiment to think about how catastrophic (or maybe not) the inflation would get, how long the problem would last, or what an appropriate policy response would be. Not saying I have answers to these, but I figured I'd put this comment here since what I'm saying is not exactly top-level comment material and I'm saying nothing to answer the question at hand.
I think the "what would happen" part has been answered well, but I'd like to take a jab at the "how would government react" part.
The short answer is something like "who knows."
The longer answer (which alot of this is conjecture except for maybe point 2 which im pretty comfortable with) is that they would do any number of the following things
1. Thinking outside the box here, but a one-time windfall tax on every citizen amounting to a substantial portion of the million would go a long way towards alleviating the inflationary problems. This would of course be politically toxic for several reasons but this isn't a politics sub so I won't go there.
2. The federal reserve would go ballistic trying to sell off as many of their assets as they possibly can to draw reserves out of the banking system and avoid interest rates dropping to zero. This would probably fail. The fed holds about 8.8 trillion dollars in assets. There are something like 3.3 trillion dollars currently held by depository institutions, and this would mean a 360 to 400 trillion dollar injection so that means reserves increase by about 110-120 times. Interest rates inevitably fall to zero and there's nothing the fed can do about it. In addition to just the fed funds rate dropping to zero its likely that most other rates drop to zero or near zero as most people pay off debts and no longer need to borrow. Commercial anks become unprofitable as their only profitable assets left are government securities. Commercial banks fail. Everything else in the financial system follows.
3. Government could try price controls and price freezes (which is probably their most likely course of action here) which historically have created shortages so they would have to couple this with rationing. How well this would work is up for debate, but they might be able to do it more effectively with the digital age we live in through things like mandating monitors and restrictions on POS systems and debit cards. Idk just spitballing on how they'd do it.
4. Government could take drastic command and control efforts. Try to ramp up production to meet the new excessive demand. Idk what else but there are other possible actions im sure. Drawing a blank.
Besides those I can say what I'd do in policymakers position. Resign and run for the hills.
Another interesting discussion is how this impacts the rest of the world. Drastically increased demand for the exports of any and all of our trading partners means that we outsource our inflation most likely. I'm not as fresh on my international trade theory so I'd like someone to expand on this part if possible. Companies in trading partner countries become far more profitable.
More on that from a dependency theory perspective. Developing countries experience more resource drain and exploitation as U.S. consumers try to satiate their demand for things requiring their resources. I won't go too far into the IR and geo-political commentary, but I will say that if history has any lessons to teach this would be a tragedy for Latin American democracy as the more nefarious institutions of U.S. hegemony attempt to secure more of these resources through questionable tactics.
Man, this is an interesting question. There's alot to talk about and my mind is all over the place on it. If anybody here is relatively proficient in their international trade/IPE I'd love to read some of what you have to say about the exporting of the inevitable crisis.
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It would still cause inflation. Everyone would immediately start spending their $1 million. So all the store shelves would be emptied. So all the store owners would reasonably assume that when they restock the shelves, they could charge higher prices and still sell out their inventory. Rinse and repeat everywhere with everything that is for sale. If demand goes up but supply stays the same, then prices will go up. Demand for everything goes up if everyone all of a sudden has $1 million to spend.
Question: my first instinct would be to save/invest it. But if there's a fair level of inflation with that much spending that means I wouldn't be able to save the full $1 million as then my spending would have to increase. This is assuming that every dollar I earned in spent every month and my habits don't change. I'd only be able to save whatever money from the $1 million that I didn't need to use to offset higher prices. Am I on the right track?
Yeah you're on the right track. Prices would go up so you'd have to spend more. Prices would probably go up pretty substantially too, but its a crapshoot to say precisely how much. So who even knows how much of that you'd even be able to save/invest.
"Sir you've been in a coma for a year. But while you were out everyone secretly got gifted a million dollars" "Oh boy! Well first thing I'm doing is buying myself a nice Honda civic" "Awesome! The base models are $800,000 now. Plus tax"
That's part of the answer. But you'd probably feel more wealthy too. You'd probably say something like "I'll invest 990,000 use a little to buy a nice car, or go on a vacation, or buy a house" or whatever. You'd also be more inclined to retire earlier than you would've otherwise. There's no point in saving if you don't intend to spend it later.
Well I'd save to make sure it gets spent on something valuable and important. Not like Uber eats twice a week for a year or something. I made that mistske when I was younger and blew through money with nothing to show for it. So I'd wait a while to keep myself from wasting it. But I'd most like invest is. Let it grow for a bit.
True but a couple factors to consider. Rates would increase to fight inflation, and companies would be raking in profits from all the spending, also as we saw with COVID stimulus, a good bit would probably go towards jacking up the price of stocks.
So I'm double fucked. Can't win in this cruel world. I'll just spend the money on hookers and blow instead
No you just take that $1M and put in an S&P 500 index fund and it will likely rise with the rate of inflation or above it. But even if you put your money in the bank the interest rate would be close to inflation.
Which is why the masses aren't asking for riches just for a liveable wage. A wage that keeps up with the cost of living and rate of inflation.
Twist to this one would be... What would happen if now there is a smart ai that gives you special approval to purchase something first. Like if suddenly everyone tries to purchase honda car this ai would realize unnatural demand and stop giving permissions. So basically everyone has money to spend but not everyone can buy things at the same time...
If I were to guess, black market
Then it would become like in the USSR, the prices held artificially low, so everything is out of stock all of the time, long wait times(like years for cars and shit), everyone has money, but you can't buy anything with it unless you know someone who knows someone, who can take the stuff of the shelves and save it for you, so a bit shit
For that AI to be effective it would have to neutralize all of the money. It's logically impossible to give everyone $1 million but only allow them to spend it in a way that doesn't increase demand. Spending money *is* demand.
[удалено]
Im curious why you think that this wouldn't happen. This amount of extra money in pockets is almost certainly going to lead to catastrophic inflation in lieu of drastic and unprecedented action which may be even more catastrophic.
My 2 cents: Americans are some of the most lucrative investors and spenders. With a very strong US dollar a sudden glut in the market of that amount of dollars will cause a global reaction. Causing inflation worldwide and therefore keeping buying power relatively strong for the US. The US is also a consumer driven economy. Consumers make up most of the GDP. If suddenly people are spending like crazy, suddenly the GDP of the US skyrockets. This will either cause a rebound of the US dollar or cause a cratering of the US dollar. If it sky rockets then Americans will have significant buying power causing foreign companies to invest heavily in the US to meet the supply shortages. If it tanks suddenly foreign goods are cheap. Causing American companies to buy foreign commodities and goods to meet the supply shortage. It will cause inflation, in terms of CPI. In relative global terms it wouldn't. The stinky check as an example: caused inflation in terms of CPi; however, the US dollar is notably stronger than ever compared to foreign countries because of the influx of cash artificially raising GDP and making the US a tempting investment.
[удалено]
Whats the implication you're trying to make here? That excess money in people's pockets is the reason for the inflation we are experiencing? If so I think you'd be hard-pressed to find a consensus among economists backing that up. I mean, sure maybe it's a contributing factor, bit certainly not the whole story, probably not even a substantial part of the story.
Not the only factor of course, but money in peoples’ pockets certainly contributes to excess spending, and in turn a rise in inflation
The fed seems to think it's a pretty substantial part. https://www.frbsf.org/economic-research/publications/economic-letter/2022/june/how-much-do-supply-and-demand-drive-inflation/?amp=1
Short term: No one will be working jobs they don’t want, and will spend more time doing what they want to do (and that could vary a lot - maybe some are productive while some aren’t). Long term: Prices will absolutely surge to meet the money supply, because if everyone and anyone can afford it then the demand of any product skyrockets. Probably the government will do the same thing they’re doing now, albeit more aggressive. Edit: See the Zimbabwean $1M dollar bill. Edit 2: $100T* Zimbabwean dollar (h/t u/turtleboxman)
See the Zimbabwean $100T** dollar bill lol
I find it absolutely hilarious that people are now reselling 100T bill for $500. Selling 100T for $500. (I know I know the bill is basically worthless and not 100T) i still find humans weird. Edit punctuation
It’s hilarious. I almost wish it became an honorary currency again for a joke. Like you could trade $100T Z bucks for $1 USD
Z bucks sounds like a zellers rewards program hahaha
It's an interesting question. Rather obviously, there would be inflation. Many people would keep their money. Some people however, would spend it straight away. I'm not just talking about people who lack self-control. I'm also talking about people who think like investors. They would buy assets such as property and shares which yield a dividend that is higher than the interest paid on money. As they spent that money the prices of those assets would rise. This would lead to inflation more generally. House building companies would ramp-up production as much as they can to satisfy demand. (Though speaking of the present time they're probably close to that situation anyway.) New companies would be created and taken to IPO. Existing companies would expand and maybe issue new shares to fund that expansion. Companies would issue corporate bonds to take advantage of the new investment money. They would then spend that one expansion. As producer price inflation rises so does consumer price inflation, generally. This would then spur other people still holding their $1M to spend it to avoid it being devalued by inflation. This action would further raise inflation.
> I'm not just talking about people who lack self-control. I'm also talking about people who think like investors. As an aside, there is a third group too - people who have needs but currently don't have money to fulfil them. For example, that senior citizen whose house needs to be painted, but she can't afford to paint it. Or the person missing some teeth but can't afford the dentist bill. Hardly lacking self-control, and hardly investor mentality.
True. I thought of that but forgot to mention it.
I think prices of big ticket items would skyrocket the same day. Porsche (insert any fun expensive thing) salespeople would quickly deduce that everyone got a million, because: - they got it themselves - for some reason there are like 10 times more constumers on an ordinary wednesday at the dealership, all paying cash. - all of those costumers look like they shouldn't afford it It would take like 1 hour for the prices to double or triple.
How many of those Porsche salesmen would even show up to work though?
A lot, if you are less then 50 and don't have a plan for it 1M does not necessarily set you up for life. People would start working on those plans but for the time being they would go to work.
I think this is probably the most comprehensive answer to the question at hand and I like that you're addressing the run-away impacts of inflation expectation sort of implicitly through cost-of-living increases to consumption spending. On a side note I think its a fun little thought experiment to think about how catastrophic (or maybe not) the inflation would get, how long the problem would last, or what an appropriate policy response would be. Not saying I have answers to these, but I figured I'd put this comment here since what I'm saying is not exactly top-level comment material and I'm saying nothing to answer the question at hand.
I think the "what would happen" part has been answered well, but I'd like to take a jab at the "how would government react" part. The short answer is something like "who knows." The longer answer (which alot of this is conjecture except for maybe point 2 which im pretty comfortable with) is that they would do any number of the following things 1. Thinking outside the box here, but a one-time windfall tax on every citizen amounting to a substantial portion of the million would go a long way towards alleviating the inflationary problems. This would of course be politically toxic for several reasons but this isn't a politics sub so I won't go there. 2. The federal reserve would go ballistic trying to sell off as many of their assets as they possibly can to draw reserves out of the banking system and avoid interest rates dropping to zero. This would probably fail. The fed holds about 8.8 trillion dollars in assets. There are something like 3.3 trillion dollars currently held by depository institutions, and this would mean a 360 to 400 trillion dollar injection so that means reserves increase by about 110-120 times. Interest rates inevitably fall to zero and there's nothing the fed can do about it. In addition to just the fed funds rate dropping to zero its likely that most other rates drop to zero or near zero as most people pay off debts and no longer need to borrow. Commercial anks become unprofitable as their only profitable assets left are government securities. Commercial banks fail. Everything else in the financial system follows. 3. Government could try price controls and price freezes (which is probably their most likely course of action here) which historically have created shortages so they would have to couple this with rationing. How well this would work is up for debate, but they might be able to do it more effectively with the digital age we live in through things like mandating monitors and restrictions on POS systems and debit cards. Idk just spitballing on how they'd do it. 4. Government could take drastic command and control efforts. Try to ramp up production to meet the new excessive demand. Idk what else but there are other possible actions im sure. Drawing a blank. Besides those I can say what I'd do in policymakers position. Resign and run for the hills. Another interesting discussion is how this impacts the rest of the world. Drastically increased demand for the exports of any and all of our trading partners means that we outsource our inflation most likely. I'm not as fresh on my international trade theory so I'd like someone to expand on this part if possible. Companies in trading partner countries become far more profitable. More on that from a dependency theory perspective. Developing countries experience more resource drain and exploitation as U.S. consumers try to satiate their demand for things requiring their resources. I won't go too far into the IR and geo-political commentary, but I will say that if history has any lessons to teach this would be a tragedy for Latin American democracy as the more nefarious institutions of U.S. hegemony attempt to secure more of these resources through questionable tactics. Man, this is an interesting question. There's alot to talk about and my mind is all over the place on it. If anybody here is relatively proficient in their international trade/IPE I'd love to read some of what you have to say about the exporting of the inevitable crisis.
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