Why the Fed has made a historic mistake on inflation: Because it didn‘t want to do the other historic mistake.
The Fed‘s basically got binary options here: Keep inflation from ruining lives and savings or saving the economy from collapse. Or trying to do just a bit of both.
I’m rather asking myself: When you‘ve got a water pipe with a valve you can just open and shut and the leakage getting larger and larger with less and less water arriving at the end, is it the one operating the valve doing the historic mistake?
The historic mistake is all the can-kicking that got us here. "The market can remain irrational longer than you can remain solvent", as the saying goes, but it sure does seem like the road the can has been kicked down is ending pretty darned soon.
They can kick the can for another 20-30 years at least before they're forced to change tactics.
In the Japan scenario that the US is following, the US is just now getting to where Japan was in the mid 1990s. And that's Japan without the global reserve currency and the numerous financing benefits that go with it.
The US has an enormous asset base to debase against, to eat, before it arrives at truly severe problems. It has plenty of spare taxing capacity across every income bracket.
And as the feds crush the income brackets with higher taxes over time, socialized healthcare will continue to creep up the income bracket, taking up more and more of the market (out of necessity due to cost; middle and low income brackets will lose more of their disposable income to taxation, healthcare will become that much more of a burden).
Interest rates will remain exceptionally low for decades to come. The average rate the US Govt pays on its debt will continue to sink lower over time, as the mountain of debt soars higher. That can continue until at least the range of $60-$90 trillion in public debt (1% - 1.5% on $60t-$90t is where they'll push it to over time). 1% on $60t is affordable right now. The skeptics will proclaim such low rates on such a giant pile of debt is impossible - it's not; they would have claimed (circa the mid 1990s) that what has already happened would be impossible too. Courtesy of Japan, we already know what can and will happen, and so does the Fed (even though they constantly lie about it).
The massive debt accumulation (in government and corporate) will take care of a lot of the inflationary pressure that would otherwise be present, courtesy of mediocre growth (the debt accumulation and maintenance robbing the economy of capital it needs to grow faster; the debt acting as a heat sink, which is exactly what it has done to Japan).
This inflation spike is transitory (the people saying that were too early on the duration aspect though and so they got mocked for it), the labor market is about to crack, growth is at recessionary levels, crypto has crashed, bubbly stocks have crashed. The housing market is going to get hit (although it won't be like the great recession) as the labor market gets rattled, people will shift that much more conservative, and blue chip stocks will get hit harder (blue chips like eg KO, which have largely avoided the damage in the market so far). With mediocre growth and a broken labor market, the inflation wave won't be sustainable over a longer time frame. It's better to think of the present inflation wave as a large one-off reset to higher prices (fallout from the various effects and choices during the pandemic), rather than a persistent ongoing event. That type of inflation burst event might happen from time to time over the coming decades as a consequence to various programs the US Govt and Fed run to try to spur the economy and manage high debt levels. For example, as the economy continues to weaken, the Biden Admin will start talking about trying to do another stimulus shot and or infrastructure.
Corporations have rapidly sapped their pricing power to counter inflation. Consumers can only take so much of that, and I believe we're clearly seeing weakening by the consumer in their willingness to keep absorbing huge price hikes on consumer goods. The corps will begin slashing the human cost soon (both delaying hiring and firing) and pushing automation more (eg if your local Walgreens or CVS doesn't have a self-checkout, it soon will; if your local McDonald's doesn't have digital kiosks, it soon will; they'll push labor cost onto the customer wherever they can).
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edit:
Someone (greyed out account) replied with this, and I thought it was worth touching on:
> there's no way you can convince me healthcare costs will go up if we kick the capitalists out of the industry
Well that's not what's going to happen and it certainly won't be a smooth event (the US wakes up one day with a shi...
The US is absolutely not following Japan. Japan has almost no immigration while the US practically has no borders. Our birthrate is also much closer to replacement levels than Japan. Because there are more (and growing) people chasing fewer assets/production the US can easily end up in an inflationary spiral while this is nearly impossible for Japan.
Well, yes, the birthrates and immigration can help the U.S. but that was not the point the OP was making -- and I am making too -- Japan has showcased boundaries one can reach on relation to debt and fiscal policy; and also that negative interest rates and meddling with rates does not work per se and out of the box.
The US is adding 1.x million people per year, on a decline. The addition is entirely meaningless against the context. The US is also aging persistently, as with most of its peers.
Exaggerated, your premise rests on: the US is not exactly like the Japan scenario, it's 98-99% like the Japan scenario. Point being, that tiny population expansion is trivial and will be mostly gone soon anyway.
The population addition in question is majority lower income, lower education oriented in numbers. The US has an inverted immigration system vs eg Canada or Australia (they focus on higher income, higher education, skill-based immigration). That fact further debases the potency / value of the population expansion. US education has been eroding for decades in terms of quality, so those lower income, lower education new immigrants are entering the US at a particularly mediocre time for their purposes (and they'll also simultaneously run into the automation, robotics, AI buzzsaw that is in the first or second inning; further devaluing what that population expansion brings to the table).
2/3 of the US immigration system isn't foreign STEM grads. Not even remotely close. What part of what I said are you actually trying to disagree with?
I was very clearly speaking about the overall US immigration system and how it's structured.
Foreign STEM grads quite obviously fall into the higher income, higher education, higher skill grouping that (per my prior reference) Canada and Australia prefer to focus the majority of their immigration on (whereas the US does not focus its immigration in such a manner).
> Immigrants in the U.S. _as a whole have lower levels of education than the U.S._-born population. In 2018, _immigrants were over three times as likely as the U.S. born to have not completed high school_ (27% vs. 8%). However, _immigrants were just as likely as the U.S. born to have a bachelor’s degree or more_ (32% and 33%, respectively).
> Educational attainment varies among the nation’s immigrant groups, particularly across immigrants from different regions of the world. Immigrants from Mexico and Central America are less likely to be high school graduates than the U.S. born (54% and 47%, respectively, do not have a high school diploma, vs. 8% of U.S. born). On the other hand, immigrants from every region except Mexico, the Caribbean and Central America were as likely as or more likely than U.S.-born residents to have a bachelor’s or advanced degree.
Not the OP you're responding to but your own source disagrees with your assertion. Relevant quotes above, emphasis mine. Also, I'm not against immigration but it gets old seeing accusations of xenophobia when someone is trying to have a reasonable conversation about the very real macro-level challenges involved in immigration. Stifling this sort of discourse also ends up being a disservice to people that have worked very hard to immigrate to the US as it can lead to people sweeping under the rug the challenges people will face when arriving.
The federal government alone already spends 920 billion on health care for people under 65 [1] plus 667 billion for people over 65. [2] That's 1.5 trillion for the federal government alone: the states all contribute to their Medicaid programs, and a lot of hospitals and hospital systems throughout the US are actually government-owned, usually at the county/city level. The problem with US health care costs is definitely not "the USG doesn't have a big enough stake." It's one of, if not the single biggest US government expenditure already.
I support single-payer, but it's not going to solve the US health care cost problem - and "solutions" to it are likely not going to be pleasant. Likely, in the practical world, whatever cost control ultimately ends up being imposed on whatever system we have 20 years from now is going to make health care worse. Indeed, what makes US health care so bad right now is in part ineffective cost control measures.
That's correct, it won't solve the US healthcare cost problem, and I never suggested it would.
What it will do, is slow the expansion of cost vs what we'll see in the private sector coverage. That slowdown will be courtesy of the massive-scale, centralized, top-down pricing push-back capability that the government has (and has very strong incentive to use as the years go by, given the fiscal situation).
The cost per capita of the two systems will split apart more and more as time goes by.
Pricing push-back seems wholly non-existent. Not sure why you would anticipate any real control mechanism in that regard. The price of health care in the US, with largely subsidized medicine, is the most (or nearly if not) outrageous on earth.
The government might enact further measures which will likely have consequences not unlike the current policies
I think there is one factor you're neglecting, which is that you can no longer just pay attention to the United States and assume that you've described the entire world economy. China and Russia now both have the power and desire to stab the US economy, and more such powers are coming up behind them. It'll hurt them too, but they now both believe it may well be worth it because they can recover faster and better, and it isn't clear that it'll be any better than what the US will already do to them if they defy the US (e.g., taking Taiwan). It is a characteristic of our US elite that they are exceeding and extremely pain averse. It is not shared by everyone else in the world. At some point in the next few years, if not the next few months, someone is going to calculate that knocking down the house of cards that the US-driven economy represents will still net benefit them. The only way the US could stop that is to pull its industry back in and accept cost increases as a result... but see previous comment about the near-total inability of our elite to accept pain.
They also weren't really concerned about the leak as it destroyed the households below it, that is until the people on the floors under them started collecting the water for their own use (increased wages) and the pressure in the penthouse bathrooms started being the subject of complaints, then they had sudden urgency to resolve the situation.
The fed worrying that regular workers are getting too large a pay increase was a secondary concern for them. I think it was much more important to consider the overall economy than to worry about salary changes for the little people. Five, no eight, now 10% inflation is a bigger thing than paying dishwashers $15 an hour and you still can't hire enough.
I’m liking this dam analogy thread. If rain and rivers create more volume, would printing money be like placing large boulders to raise the dam level, without creating more actual value?
If we are worried people are paid $18 an hour and that is too much and that gets the gas prices up -- but mainly things that are not that volatile like rent and consumer stable products -- then we are in for a rude awakening and also we live in a "slavery" driven world still.
The production of oil and supply chains is not even close to 2019 levels. Electronic manufacturing and tooling needs 1-2 years to catch up to 2019 (current) demand. Scaring investment does not help.
Let's beat the metaphor to death. They opened the valve because there was a fire below that needed to be put out. Better to deal with flood damage than lose the whole enchilada.
It 100% is. And what’s more crazy is that Alan Greenspan admitted that his biggest career failure was to leave rates too low for too long just prior to the Great Recession. And then… his successors did exactly the same thing.
It is almost like the system should have automated rules in place to prevent this from being possible.
Note that there are probably just as many economists that said rates were too high. After all the target inflation rate was 2-3% yet the inflation was under 2%. That translates into hundreds of people unnecessarily out of work.
Yeah, I think there are a lot of problems with the current system and you’ve nailed it. They set a target using metrics that have radically changed over time and don’t reflect major components of inflation that real people experience (cost of homes) or asset price inflation. Anyone with eyes can look at charts of pretty much everything but a basket of consumer goods and see the massive inflation, and this was fine because it wasn’t in CPI figures… until now. And so that target range based on limited metrics led to exacerbating a massive problem that was evident for at least 5-6 years.
No, I think we completely disagree, you're just misreading my statement.
I say that inflation was too low 1990-2020 not because they mismeasured it, but because the Fed kept the rates too high.
The CPI basket undermeasures volatility, but it's not bad at measuring inflation. Not great, but every alternative basket I've seen proposed has been worse.
to an outsider (me) it looks like the Fed thought that if enough people believed the lie ("it's transitory") that things could go on despite fundamentals being out of whack (and we had quite a few people (economists, financially literate people, etc.,) go along for the ride of the ruse... but as always, the chickens eventually come home to roost in their own nest. and so it has and now we're here.
Was it totally preventable? Not likely. Did it have to be so precipitous and ruinous? Nope. They could have come correct and could have adjusted rates and have encouraged people back to work but dialing back the stimulus sooner --slowing the money printer.
As a Fed watcher I can dispel a few of these notions. The Fed was never going to tell people inflation was taking hold. The Fed tells people what they would like the market to be… not what it is. They set the “framing” used by many market participants, this framing is one of its key tools.
The Fed can’t control government spending. Massive government spending, funded by new money, caused inflation. The Fed can’t do much about that. If anything Powell consistently advocated for a more balanced federal budget precovid.
Most central bank news is terrible. Follow Joseph Wang- @Fedguy12 on Twitter. He’s a former Fed trader with good insights, lots of podcasts. His book, central banking 101 is fantastic, very readable.
I don't the this cause of inflation is settled. Right now it's higher energy prices, in large part caused by the Ukraine war. Then covid recovery caused a big demand increase, and the shipping industry building ever larger ships that can only go to the LA ports on the west coast led to a delivery shortage, which led to a squeeze, then a worldwide shortage of ICs caused auto manufacturers to have a shortage, the Ukraine war even caused wiring harness shortages. It's one thing after another, those were not caused by the Fed or stimulating spending from the government. I'm sure the government giving people money so they wouldn't lose their lives during covid unemployment was a stimulus. But there were all these other things going too.
Yes I agree. There are many causes of inflation. The two principal ones IMO are (1) Supply / demand imbalances (2) Government expansion of the money supply working through the economy.
I think you mean they Keystone XL pipeline. The Keystone pipeline has been running and Biden didn’t cancel it.
Keystone XL is a zombie project which abandoned by the development/infrastructure company. It had been stuck in regulatory review and litigation for a decade.
Environmental reviews by both the Obama Admin and Trump admin state that Keystone XL would not have lowered gasoline prices. You are pretending like all oil/gas products are fungible, when in reality most refineries in the US are not capable of refining all raw product. Hence “Energy Independence” is purely a marketing term and we still need to export lots of raw material and import other kinds of raw material to match what we are capable of refining.
Is that really the case though? I thought inflation is just when stuff gets more expensive, and how it’s caused is complicated. So, it can be increase in demand, decrease in supply, both on the buy and sell side (ie supply/demand of things, including dollars).
I think it’s reasonable to say that the majority of the planet shutting down during the pandemic has at least as much to do with inflation as the fed’s monetary policy, if not much more.
Resuming economic activity after shut downs (and the habits the shut downs changed) is taking time. There is no obvious natural experiment to tease out how much is caused by CB interest rates and how much is fiscal policy. Most of the countries that did one also did the other.
Also, data points on these issues are gathered monthly (if that often), so current analysis will miss a lot in the “fog of war” until there is more data to analyze.
France deficit spent more than germany, and have lower inflation figure.
Someday, people will understand that central banks issue less than 8 percent of the circulating money, and that government debt is just another way of financing retirement pension funds.
That's true in exactly the way that disproves your point. Prior to the Federal Reserve era, there were so-called non-fiat currencies, that is, those convertible to silver or gold. Except when they weren't. There were many notable periods of inflation and deflation, and many periods during which convertibility was suspended.
So only in the most narrow sense is it even possibly true that "the US did not have inflation when it did not have fiat money": if you ignore the times when convertibility was suspended, it becomes a slightly more accurate statement, but still not true as it ignores inflation soon after the founding, large deflationary periods in the early and late 1800s, and subsequent inflationary periods prior to WW I. So you have to ignore convertibility suspension and the inflation and deflation in order to argue that there was no inflation or deflation.
The one iron-clad law of "non-fiat" currencies: eventually they will become fiat currencies.
> The Fed tells people what they would like the market to be… not what it is.
Fundamentally, you can try to control expectations by feeding biased projections, but you have to maintain a certain signal-to-noise ratio in doing so, or else the market will learn to ignore you. You can feed the market inaccurate projections only by spending down your accumulated credibility, which has to be bought back later with accurate projections.
(This applies in real life, too. It takes trust to be believed, and it costs trust to mislead).
"If a new inflation target is too ambitious, and the central bank fails to attain it, the central bank may lose its credibility, which may render less effective any other policies it pursues."
[https://www.federalreserve.gov/econres/notes/feds-notes/rais...]
If the market has learned to ignore the Fed, then it becomes very costly for the Fed to achieve accurate projections and earn back its credibility, because it can't rely solely on influencing expectations to achieve its results. It is left only with backing up its bark with a real bite.
> Massive government spending, funded by new money, caused inflation. The Fed can’t do much about that.
False. The Fed controls the money supply - that is, the creation of new money. (Congress doesn't, thank God.) If the Fed didn't increase the money supply, the government would have to borrow more on the open market, or else tax more. The first might cause visible issues earlier; the second would be politically expensive.
Traditional economics teaches us what you said, but the low inflation environment from 2009-2019 suggests it’s more complicated. The Fed was struggling to even achieve the target +2.0% inflation rate for that entire decade, even as Congress passed gargantuan spending bills every year.
I tend to agree with your sentiment, but wanted to point out there are obvious issues with our analysis.
Honest question: how can you prove the current inflation is not “transitory”?
I have heard pretty good arguments for the idea that supply and demand are still trying to find a new equilibrium in the post COVID demand shock.
What is the specific criteria that was used to reject transitory?
I tend to be skeptical of anyone who accuses others of lying when there are obviously simpler reasonable explanations: it’s hard to predict how the entire economy will react to turning off the spigot.
I don't need to prove it. The administration itself is admitting there is inflation, but now are pinning it on external factors rather than Federal spending as well as policy by the Fed reserve bank. Indicators were indication inflation before Feb 24. Inflation numbers for Jan and Feb has inflation at way above normal. So not just indicators but actual inflation was measured.
> The administration itself is admitting there is inflation
That proves that the administration knows it has an optics issue, not that inflation isn’t transitory. Inflation is currently the number one issue on most voters minds.
I don’t doubt that inflation exists. I doubt that a substantial portion of it is related to issues that won’t resolve themselves as the economy renormalizes post-COVID and buying habits return to something like pre-COVID.
So you're saying they'd prefer to lie to the people?
It's number one because the admin tried to bury the issue by cliaming it was transitory while many outside DC and the Whitehouse were saying, you can't print money, do the BBB to the tune of trillions (where even Yellen balked) send out stimulus cheques, press for a $15 minimum wage (this should have been gradual), keep rates low AND expect there not to be inflation. But they said, nah, you're being chicken little, relax.
Covid did stress the economy, but it would do the opposite of inflation, if they had not stepped on the gas. It dampened demand. It also put some people out of work and also encouraged some to leave the workforce early.
The admin isn’t necessarily lying. They are trying to be responsive to peoples’ concerns by admitting there is inflation, which there is. Admitting there is inflation and they are taking steps is optics 101.
I agree that many outside of DC jumped on Larry Summers’ bandwagon and are screaming that it was never transitory. But that still isn’t proven. And lots of those people happen to be political adversaries of Democrats, so they have additional reason to try and pin another problem on this president, whether it is his fault or not (which is what your Democrat wish list of things that never happened/passed so can’t affect inflation looks like). I would also note that you are mixing fiscal and monetary policy as if the White House admin had control over either.
Printing money (expanding the M1 money supply at least 4x) and a near zero interest rate environment happened for a decade after 2008 with stubbornly low inflation. That doesn’t necessarily lead to inflation.
COVID didn’t dampen demand for more than a month. It changed where demand was aimed. Money that pre-COVID went to restaurants, concerts, and travel was aimed at different goods like home improvements, in-home entertainment, and crypto/stonks. Inflation didn’t show up when households were thrown $1600, unemployment insurance claims saw richer payouts, and PPP was issued. It happened after buying and spending habits changed when people came out of hibernation and were spite spending.
Again, I’m not saying inflation isn’t transitory. I’m saying I don’t think we can know for sure until the supply-demand mismatches created by COVID lockdowns and behavioral changes have returned to some equilibrium. Only then might we have enough info to be sure, especially because transitory opponents will not set goal posts for the definition.
The only one solid piece of evidence I see for some kind of sustained inflation was the Great Resignation, where people were changing their desires and expectations for work and life. Combined with very little immigration since Trump’s inauguration, and we have not enough supply of low paid labor.
Yeah, this is an odd take. 8% inflation is not great, but it's hardly a historic disaster. Especially given the even odder take that they think the corresponding rise in wages somehow makes it worse. The fiscal stimulus of the pandemic was perhaps too large, but it was extremely effective at forestalling catastrophe in the wake of a black swan event. The mistake was probably tightening too slowly from the 2007-era stimulus that left us without a lot of room to maneuver.
If you want to point a finger, maybe point it at the politician who threatened the Fed chair for not setting negative rates 2 years ago.
At the time, every commentator not in Congress or the Republican party said it was a bad choice to stimulate the economy with a sugar-high unneeded stimulus. But once that's in the system, correcting it hurts the next guy in charge, thus we don't get anywhere till we hit a crisis point.
No. There is no "real" number. 8% is the indicator we use. When it hits 8% we know it's higher than when it's at 3%. You can't ever take that number and extrapolate what things are actually going to cost you day to day. Some things are way more than 8%. Some prices are going down.
Yes, most likely. By the definition in use, unquestionably. Cost of living feels like it is up 20% (albeit location dependent), which may be what you are thinking of, but inflation and cost of living are decidedly not the same thing.
Inflation seems really spotty to me. Like, dunno, some brands got very expansive while some not. Some restaurants raise prices alot while others lag. It is strange.
That is 100% normal. Inflation isn't a magic force that is applied evenly to the economy. It is an emergent property characterized by decreased purchasing power of money. There is a misconception that inflation is caused by a policy or by some other hidden force. It is actually caused by the same laws of supply and demand that govern every other economic calculation. Right now, demand for almost everything (including labor) is very high and supply is very low. Conversely, the supply of money is high. So prices and wages all go up. Currently at different speeds. Energy and food supplies are being pinched by the war in Ukraine which is causing them to inflate faster than other products. Supply chains are affecting imported goods in a lot of places more than domestically produced. Things like food and energy are largely "inelastic" which means that demand can't go down even when price goes up. You can slow down your purchases of new phones or shoes or other stuff, but you can't eat less or stop heating your house. Things where demand is more elastic, you may just see people buy less in response to high prices until it hits equilibrium.
IIRC, CPI inflation metrics do tricky things with rents versus mortgages, so cost of living can appear very different for renters versus homeowners, even in the same neighborhood.
CPI is well defined and has a clear construction, as does PPI and GDP deflator. The 'real number' is something people seem to bring up as a signal that the beaurocrats an politicians are lying to us, but it is not well defined or defined at all, so it's impossible to disagree with.
Inflation as measured by CPI or Core CPI are objective measures. You are comparing that against a subjective measure but pretending like it is objective.
There are reasonable arguments to make that CPI is insufficient for measuring everything that we spend on (it underweights healthcare, gas, college costs, and lots of luxury investments like stocks and artwork). There are also reasonable arguments that cost of living in some regions is growing faster than 8% (the actual CPI number obviously isn’t homogeneous across the entire country).
Also important to note that there is no “intrinsic value” in dollar terms for any good. Everything is a negotiation of how much we want a thing. If you insist on Quaker Oats oatmeal instead of generic oatmeal (a personal preference), you might experience a higher rate of inflation than others who are more amenable to substitutes.
It is a single month of single year over year inflation measurement that is comparing to a year with a global pandemic in full swing. Inflation and gas prices are Republican talking points to "own the libs". Give it the proper context.
Fiat is an artificial construct, as are asset values and prices, and the cost of capital/money. No one is guaranteed a rate of return. The whole point of monetary policy is to juggle the imaginary to realize a certain reality, ZIRP, NIRP, rapidly increasing PIRP, etc.
While true, I think it is fair that people broadly share an expectation that time value of money has a positive value and that central banks shouldn’t be subverting market forces to eliminate all opportunity costs of capital.
I think it’s crucial that this expectation should not be thought of as some sort of natural law. There is no requirement investment capital have value. On the contrary, one would expect the value of capital to continue to decline over time, especially due to structural demographic shifts.
It’s also the job of central banks to manipulate capital markets (“rows in a database”) to meet their mandates and desired outcomes.
The natural rate of interest is zero. Any positive interest rate results, in aggregate, in unserviceable household debts[1]. This is elementary for anyone with even a simple and accurate understanding of the US monetary system.
Usury is bad and there are other ways to finance underwriting and the other socially useful activities banks perform.
[1] Currency issuers can always service debts in the currency they issue of course. Those liabilities are so operationally different from household debts though that they probably ought to be called by a different name altogether.
Are you also proposing to get rid of rents of all kinds? If I buy a house/ship/combine with my $100k and rent it out rather than lend the cash to someone is that somehow better and now allowed?
If tangible assets have rental fees, then why doesn't money?
See Aquinas for details[1]. But in short usury is selling the same thing twice, which is immoral.
As an example, rent to own is a reasonable and moral way to structure a real estate transaction without interest. It’s all about sustainability. Lending at interest requires borrowers, in aggregate, to acquire more funds than the monetary system can provide. It’s clearly immoral to impose conditions that are impossible to meet.
Here's my take: inflation sucks, but they should just let it run its course. For several reasons, but also, my understanding is that the US debt is denominated in USD, so they would effectively be reducing their debt.
My suspicion is that the FED will mostly be choosing to inflation to run its course rather than raising rates too aggressively, and they are trying to pull off a balancing act. Once the current panic subsides, probably things will stabilize.
You can't do that though because at a certain point inflation expectations become inbuilt and then people want to get paid more, spend more now rather than save (expecting higher prices next year) etc etc. This makes those inflation expectations self-fulfilling. The fed really needs to be aggressive enough to affect those expectations.
Why is that? The FED obviously has levers that it can push to lower inflation. Currently, the levers are kind in a tricky place. But if they let inflation run its course now, and then push the levers later, wouldn't it be effective?
What other posters are telling you is that there's no such thing as letting inflation "run its course." What actually happens is that high inflation becomes baked into the normal operation of the economy, at which point it is extremely difficult to get rid of (i.e. not just raising interest rates above the inflation rate).
Inflation doesn't "run its course". It picks up speed until it is stopped. Eventually you end up in hyperinflation, when nobody wants to hold cash for any longer than necessary.
As a side effect, the government loses the ability to issue bonds, as there will be no new buyers.
The only way to prevent this is to make sure interest rates do not stay too low below inflation for too long, and in the end, iterest rates may have to go above inflation to actually get it back down.
The dollar is highly valuable largely from the promise of its central banks to repay debts - for which the US has a strong reputation of upholding. Now that the Fed is playing games with people's expectations of their plans for interest rates (to scare the market and lower demand without raising rates in proportion), they are also poised to devalue the repayment of their loans while indicating that they will not devalue those repayments.
So in combination with inflation that will not slow down as much as it needs to, the trust which made the U.S. dollar the global reserve currency in the first place is also eroding.
Inspired by the final statement from the article:
> "Inflation that is stable and modestly above 2% might be tolerable for the real economy, but there is no guarantee the Fed’s stance today can deliver even that. And breaking promises has consequences. It hurts long-term bondholders, including foreign central banks and governments which own $4trn-worth of Treasury bonds. (A decade of 4% inflation instead of 2% would cut the purchasing power of money repaid at the end of that period by 18%.) It might add an inflation risk premium to America’s cost of borrowing. And if even America broke its inflation promises in tough times, investors might worry that other central banks—many of which are looking over their shoulders at indebted governments—would do the same. In the 1980s the recessions brought about by Paul Volcker’s Fed laid the foundations for inflation-targeting regimes worldwide. Every month inflation runs too hot, part of that hard-won credibility ebbs away."
I've read a lot of opinions from credible people who take opposite positions on every conceivable issue in regards to the economy. The state of the dollar as the reserve currency for the world is just one of many examples. At a certain point it starts to feel like nobody really knows for sure, and they're largely just guessing.
It's a weird feeling to understand that there's little that can be done, because so many of the issues we're dealing with were locked in carbonite many decades ago, e.g. Social Security unfunded liabilities. It's like a game of musical chairs, only there is only one chair left, but 27 people are still circling around it, and every few seconds another person shows up to play.
Social Security isn't unfunded. The main issue there is that it invests the money in US treasury bonds. As those bonds mature they reinvest in new bonds. That's all find and dandy, but it creates a system where SS is constantly "buying" bonds and the treasury is constantly "paying" SS. This has historically looked like a flow of money from SS into the treasury. As the boomers retire, the net flow will have to reverse, meaning the treasury will have to pay back a bunch of money that it borrowed from the Social Security administration. That's fine, they have several trillion dollars invested. The big issue is that congress has made a habit of spending other peoples money and sees a huge hole in their budget because of this situation.
Social Security is not an "entitlement" it's more like a contract and congress keeps wanting to default on their end of the deal. The amount a person gets from SS is not much more than their lifetime contributions - the average rate of return for an individual is very low, but that's not what the "problem" is.
We need a new grassroots movement to combat inflation throughout the economy and society, along the lines of the historically successful https://en.wikipedia.org/wiki/Whip_inflation_now campaign.
Attacking other users like this will get you banned here, regardless of how much they know, or you feel they know. If you'd please review https://news.ycombinator.com/newsguidelines.html and stick to the rules when posting to HN, we'd appreciate it.
The pandemic didn't shut it down, politicians and social consensus did. I said this at the start of lockdowns and distribution in excess to business, and I'll say it now.
It's a fine line between sacrificing the future "economy" to save lives now.
We will have to see if overall life loss is less or more due to the human interventions during covid mania.
At least 6 million people died worldwide so far, including more than 1 million in the US. In what universe would letting even more people die improve the economy? Dead people don’t work or spend.
Well...I guess we'll see in a year or two how many people die from starvation, depression/suicide, or are kicked out and living on the streets due to the collapsing economy.
Full hospitals and collapsing health care would have not improved the economy. You point the downsides of lock downs without mentioning why were enacted.
When mothers die giving bird, car accidents become mortal, heart attacks are not treated because there are no beds in the hospital people tend to revolt. But because it did not happen you seem to argue that the remedy was not needed.
Any article that claims the Fed has the tools to address supply troubles is too shallow to believe.
Any article that talks about the Fed's response without talking about Powell's reconfirmation is really not worth reading.
Once his job was secure, inflation was priority and he set out to destroy demand to reduce wages and the ease the burden on the broken supply chain that he no tools to fix.
Pretty much. He's going to have to force demand to recession levels to deal with the supply issues still going on from covid and now the war. It's like people forget that inflation is not only too much money, but too much money chasing too few goods.
I dont't think so, because supply can't keep up with demand. So lowering demand even significantly would have no impact on supply, i.e. the economic output.
Surely the problem is that the supply of various goods is hitting physical limits. A reduction in demand wouldn't reduce supply; instead it would cause demand to be more in line with a fixed supply level.
There definitely is a limit, but most certainly there are a ton of temporary limits. You need more workers, which are limited (the US is basically at full employment), you need new factories (which take time to build), you need to factor in if the increased demand is sustainable (otherwise you wouldn't build it).
My bad then, I read your comment differently. I see a lot of people saying Fed shouldn't raise because it's a supply side issue, but blunting demand in these situations is exactly what the Fed is meant to do, since supply is fixed in the short/medium term
For example how’s he going to fix housing inflation that’s due to the horribly broken housing supply that was basically a time bomb left by single family zoning.
Kill demand by raising mortgage interest rates. Houses will stay on the market longer and cause prices to fall. The run up over the last two years was because of FOMO and speculation more so than shortages.
Price of consumer goods is up, and one quarter ago every company was making record profits, but obviously its the FEDs fault corporate America started price gouging.
It is fairly well known that one of the predictors of future inflation is the belief in it - - a self-fulfilling prophecy.
The Fed does not have any tools to address businesses who take advantage of people believing that the prices should be higher to raise their price and in the short term their profit.
The fed has one Cannon to use, reduce or expand the money supply, and it only hits one of the three sources for inflation
It looks like they have the choice of saving the dollar or saving the economy, and it seems like in their attempt for both fixing inflation while having a "soft landing," they may get neither.
People are not getting out of crypto to pay for milk and bread, they are getting out because it's falling and they want to put their money in other things.
I said 'pay' I meant to say 'invest'.
BTC should be counter cyclical to stocks, but my bet is that they won't be.
It'll be up during 'fun times' and down during 'scary times' whereas by design it should be the opposite. That could change if something about BTC becomes institutionalized, i.e. everywhere starts accepting BTC for Oil or something but I doubt that will happen.
because there is no natural law that says Gold/Bitcoin will do well during inflation. Like all non-cash generating assets, it is driven by supply/demand and speculation (nothing to do with inflation protection)
It is the snakeoil people who promised that and gullible idiots believed/memed/tiktoked that.
Inflation is a money supply issue, especially right now - money supply is directly relevant to inflation and hard assets. The reason these assets are not up is because the Fed is threatening huge constrictions to the supply of money which people are currently believing.
A plot of land in rural Arkansas has been stable irrespective of Money Supply. The value of grain of sand on the beaches of South Carolina have been same.
OTOH, Bitcoin is not an hard asset :)
Hard/Soft classification are used by naive doomer-preppers (aka Peter Schiff). Assets are things that produce cash flow, rest is speculative. That's why the beanie baby (a "hard asset") that you bought in 1999 hasn't beaten inflation
Because the Fed is planning on raising rates and initiating QT for multiple months ahead, and they expect these actions to tighten monetary conditions and lower asset prices. If Fed actually does do this for a sustained period of time, everything but the dollar will be crushed, even US treasuries. It would be the polar opposite of printer go brrr.... maybe, vacuum go vrooom, sucking up all the liquidity and decreasing the money supply. If QE/rock bottom rates = everything bubble, the opposite would mean.... pop.
At some point if/when this course of action becomes untenable due to recession/unemployment/too high interest rates given amount of debt in economy, and Fed reverses course (which they did much earlier last tightening cycle in 2018 when markets tanked), those two assets should rise again. Gold particularly falls when real interest rates rise. But, it is likely they are more serious about taking assets down and essentially inducing a recession given the persistent high inflation. The result of fighting that to any real degree means everything keeps going down...which is literally their goal (the reverse wealth affect to slow inflation).
> At some point if/when this course of action becomes untenable due to recession/unemployment/too high interest rates given amount of debt in economy, and Fed reverses course (which they did much earlier last tightening cycle in 2018 when markets tanked), those two assets should rise again.
Right now unemployment is under 4%. The Fed has a lot of leeway to raise rates before what they are doing affects employment, and I'm not sure at all that they will allow unemployment to get too high, if they can help it.
Assets tend to correlate in volatile markets. There are plenty of papers discussing this effect. Because of diversification, people often need to sell higher performing assets to cover lowering performing ones.
A friend ran a successful small investment fund, and still went out of business during the last down turn because all his clients had to pull their money out to cover losses elsewhere.
The inflation/bubble scenario we're in has been a long time coming. I knew it would end this way- lots of people did- keep on propping up the whole economy with printed money long enough and eventually it'll stop working. This time there's no stimulus to save us, because everything is already tapped out. Honestly though, I really thought they would come to their senses back in 2015 or 2016 when they should have closed the taps. Instead they blew everything to magnificent proportions, and the crash will be equally magnificent.
Not that the Fed doesn't deserve criticism, because they do, but the public would be pissed about many of the measures that combat inflation as well, and the politicians would make sure they know who to blame (hint: not themselves).
It doesn't particularly hurt either. The Fed is supposed to act independently and is solely responsible for its actions. Trying to stir up political controversy is pure FUD.
But if it is not, then it's still their responsibility. Plus the Biden administration has kept the same chairman and really it's a board, not just one person.
There's a real alternative to higher interest rates: bring government spending under control. Notably, this was done during the 1990s Clinton administrations and it worked quite well.
This is the real answer. Everything else is just arguing about what type of band-aid we use. Root of the problem with inflation in this nation is out of control government spending and printing of money. Unfortunately no politician will seriously campaign to do this, as combating inflation results in a drop in economic boost, potential unemployment, etc. It stings at first but the other end of it is worth doing. Our hand will be forced one way or another to hit the brakes.
> Root of the problem with inflation in this nation is out of control government spending and printing of money.
Eh, not entirely. There's also a war going on, which has had serious impacts on the food an energy markets. Plus the supply chain is still all out of whack due to COVID. Neither of those is due to "out of control government spending and printing of money."
The people who reflexively complain about "out of control government spending and printing of money" have predicted 12 of the last 1 bouts of inflation.
You don’t think that the supply chain issues are related to our Covid strategy of “Stay the Fuck Home” via massive printing of money to support ridiculous unemployment benefits and bridge loans to businesses? You can argue that it was necessary to prevent an economic recession, but that argument is a bit hard to take seriously as our economy currently enters recession territory.
> You don’t think that the supply chain issues are related to our Covid strategy of “Stay the Fuck Home” via massive printing of money to support ridiculous unemployment benefits and bridge loans to businesses?
1) The US could have pursued a COVID policy of “Kill Grandma, Save the Dollar,” and still had supply chain issues. We live in globalized economy, and China's COVID policy is just as significant to the supply chain as the US's (or even more so).
2) Even if the US's COVID policy did cause inflation, a policy along those lines may have still been the right one, given the circumstances. People monomanically focused on one or a few metrics (like inflation) usually advocate shit policy that's bad for everything else.
> You don’t think that the supply chain issues are related to our Covid strategy of “Stay the Fuck Home” via massive printing of money to support ridiculous unemployment benefits and bridge loans to businesses?
The supply chain is affected way more by what China does than by any other country. I do not think that supply chain and inflation problems are just happening in the USA but world wide.
I wouldn't be so confident on pinning US COVID policy as the root of supply shortage issues consider supply shortages and soaring costs are currently worldwide problems; Other causes have been cited more commonly by economists & institutions.
It certainly didn't help the supply chain. I think the shock to the economy did more to affect people's perception of things in a self-fulfilling way than it did directly.
Yes entirely, at the very least 90% entirely. What I'm saying here isn't novel whatsoever. This is a phenomenon well documented and understood in economics for the past 5 decades. This isn't some reflexive talking point.
This phenomena is so concrete that it was seen in the gold rush era, and even when tobacco leaves were used as currency in the south. There's plenty of historical data to back this up.
> Notably, this was done during the 1990s Clinton administrations and it worked quite well.
- in the summer of 1995, the Clinton administration admitted that “balancing the budget is not one of our top priorities.”
"It worked quite well" meaning:
"We have a balanced budget today that is mostly a result of 1) an exceptionally strong economy that is creating gobs of new tax revenues and 2) a shrinking military budget." - Stephen Moore
Whoever was to blame, the issue is that politicians have been disconnected from spending constraints for too long. There are no controls that impact them when they fail to perform one of their basic duties. Deciding how to spend tax revenue has morphed into deciding how to spend future revenue across all strata of politics (local to federal). The 91fwy express lanes from 1994 are STILL tolls, which was supposed to be converted to additional freeway lanes decades ago, based on the initial project. Nope, money in the hand and promises of money in the future, is what the cities want. From this, we get wasteful slush-fund industries (eg lotteries, etc).
If inflation is occurring in Oil & Gas because of the crisis in Ukraine and inflation is occurring in eggs and beef because of monopolistic price gouging, then what is the point of lowering government spending? End the crisis in Ukraine, bring Russian oil back on to the market for its correct price and discipline the companies currently making record profits off record prices for goods.
You are advocating for increasing consumption of Russian oil despite it being used to fund genocide because you value temporary economic prosperity over cutting WW3 short before we ruin the world?
Right, the mechanism the Fed has available isn’t perfect, but it is a good tool.
In general, lowering demand for goods will decrease upward price pressure.
Unfortunately, rapid rate increases are needed. The downside will be painful. The crying, screaming, bargaining and delusion we are seeing is normal as money gets expensive, asset values drop and times get harder.
"Soak the rich" is a nonstarter if you're after tax revenue (as opposed to intentionally stoking widespread social envy for political gain), and everyone knows it. The middle class is where the real money is.
Of course, the rich would certainly like 'everyone to know it'. Wealth disparities have become so pronounced that I'm not sure this holds anymore. Let's have small armies of people washing hospitals, instead of yachts.
Very difficult to directly attribute low inflation of the 90s to Gov spending. 90s also had a record surge in economic productivity partially brought on by the integration of computers.
It can help a bit, but fiscal policy is not sufficiently effective with a floating exchange rate, unless the economy is in a liquidity trap (which the USA just exited). The reason is when the rates are low, the removed government spending it will be replaced with private.
A budget takes time to make, vote on and spend (or not spend). To be effective it must also align with monetary policy. Changing rates has a much quicker effect.
By the time Congress agrees on what to cut the inflation might even be low - due to Fed action, a recession, or repairing of the post-Covid logistic issues.
Bringing government spending under control is politically impossible. A lot of Reagan Republicans are now stuck in the Democratic Party, at least at the national level. And a significant slice of the old FDR coalition, working class people in rural states, are now in the GOP. Immigration has thrown a wrench in everything, because both parties now have an incentive to push government spending (as both Trump and Biden did). Democrats, to keep immigrants, who lean socially conservative but like immigrants in the past value social services, in a coalition with white social liberals. For Republicans, abandoning fiscal austerity is a way to peel off the more conservative segments of those same voters.
It’s the same play Tories have run in the UK, for much the same reasons—winning minorities and working class rural people away from Labour. And it’s resulted in exploding government spending there too.
As Yellen said, the Fed was right about inflation - up until 2022 hit. We were in a vulnerable position, with an extended but not inherently problematic money supply. What happened in 2022 was a mix of:
- an un-clean reopening where many states just dropped restrictions and let people go all of a sudden.
- combined with snarled supply chains.
- combined with a labor shortage.
And then on top of that:
- a war between a major oil exporter (Russia) and a major food exporter (Ukraine).
- COVID lockdowns in China making goods yet more scarce.
The Fed was in a tough spot but made good calls given the information available. Then the new stuff came in and all of a sudden we found ourselves in a pickle. The issue isn't IMO inherently too much money, it's suddenly too little supply.
All the Fed can do is nuke demand. We will not have a good time.
The elephant in the room is that the Fed had been juicing the economy with QE and low interest rates since the 2008 crisis, and did not stop after that crisis ended despite having a decade to do so.
What do you mean by un-clean reopening? Do you think policies ostensibly meant for favorable public health health outcomes should have been partially or selectively maintained for purely economic reasons? The former motivation was suspect in the extreme, while the latter is entirely inhumane.
I think that going from entirely locked down to entirely open with no intermediate steps in a lot of cases led to a glut of demand chasing a dearth of supply, especially in travel and leisure. This is more an observation, and I don't know if there was a so-called 'clean' re-opening possible.
The Fed doesn't have the tools to deal with this problem, so there is no point in blaming them. The Fed can add to the money supply and they can regulate the velocity of money, but they can't destroy it. Congress, and only Congress, can reduce the money supply by taxing and using the taxes to pay back the original issuance to balance the books.
As we know, conservatives in Congress (which includes a bunch of Democratic members) refuse to pass taxes unless they fall disproportionately on the poor. Thus, we are unlikely to see a real resolution to this problem, just more can kicking.
The Fed can absolutely reduce the money supply, by selling assets that they're holding on their books. You're right though that an austerity policy by Congress (running budget surpluses by lowering spending and/or increasing taxes) would have much the same effect.
Are they actually able to sell those assets? My understanding may be incomplete, but it seems like most of those assets are distressed - that's the whole reason the fed is holding them in the first place.
Monetary policy just borrows from the future to spend in the present. Like any borrowing, this can be smart or stupid. The federal government policy over borrowed and spent on frivolous things that did not produce a return. You can absolutely hold them accountable for past actions
The Fed can destroy money via QT. And higher rates reduce the multiplier/power of money.
Also inflation is primarily driven by middle/lower class having higher disposable income, not upper class. The propensity to spend a marginal dollar goes up significantly, the poorer you are. If Jeff Bezos sells $1B of amazon tomorrow, it's likely disinflationary in practice because he's taking that money from buyers and not spending it at the same rate
It's possible that forced selling of assets through new tax schemes could be disinflationary by routing money from buyers to the government via taxes. But then again, most of the money in equities is owned by wealthy/low propensity to consume people
There is definitely inflation due to the upper class having more money, they are just using it to buy assets instead of goods. Cheap money caused consolidation and asset price increases - you can slow it down with QT, but I don’t think you can re-rationalize the economy without involving the FTC and Congress to unwind the effects. The asset consolidation is one of the major factors driving the inflation on goods.
I do blame the Fed on that one, but that doesn’t mean they have the right tools to fix it. I think its kind if naive to believe that asset inflation has nothing to do with goods inflation. PE and megacorps have been buying up everything in sight and you want me to believe its a coincidence that prices are suddenly skyrocketing and the market is responding sluggishly? Because that’s exactly what you would expect if a bunch of parasites were suddenly running most of the economy.
You have to clean up the market of consolidation and tax the money away from the wealthy, who got 85% of the stimulus and used it to buy up the economy.
The Fed has been given two objectives: 1) Regulate inflation and 2) Regulate the economy. They only have one knob to turn - interest rates. QE might be considered a second knob but it's really just an extreme booster on the first knob used when it reaches the end of travel (zero).
>> and Democrats are searching for villains to blame, from greedy bosses to Vladimir Putin.
How about congress look in the mirror and all the free money they've been handing out AND spending.
On a related note, why does boosting the economy always involve borrowing money - either on the consumer side or the government side? We never talk about debt (deficit isn't debt, it's the rate of change of debt). Fiscal responsibility is always pushed aside for short term goals.
Yes, and the administration has also made historic mistakes on energy and foreign policy.
We've got a brewing war in China.
We've got an active war in Eastern Europe.
People literally cannot feed their infant children.
Is there anybody who seriously and honestly believes that Joe Biden should be in charge of assembling a team to solve these issues? Does anybody seriously believe that people like Pete Buttigieg should be in charge of doing anything to help alleviate these supply chain and energy problems?
Trump was the one who tried his hardest to screw China. Trump got his Congress to pass unneeded tax cuts. I agree Dems went along w COVID stimulus. Trump wanted on more stimulus, Congress deferred, then Biden got one. Biden didn't cause the war in Ukraine, if anything Trump encouraged it by talking about getting the US out of NATO.
One thing worth noting is that one minor reason the dollar is very strong now is that the Fed was actually the first central bank to start raising rates. A better title is probably: "Central banks around the world have made a historic mistake on inflation"
Can someone help me understand why the economist is blaming the US Federal Reserve when the US Congress threw roughly 4 trillion dollars at the economy in the form of:
...the Coronavirus Preparedness and Response Supplemental Appropriations Act (2 trillion)
...Families First Coronavirus Response Act (FFCRA)
...Coronavirus Aid, Relief, and Economic Security (CARES) Act
...Lost Wages Assistance (LWA) Program
...the 12/20 CAA
...the American Rescue Plan Act (1.9 trillion)?
Perhaps I'm being a tad cynical but this seems a lot like scapegoating so Congress can escape liability for legislation it thought (wrongly) would lead to a glorious congressional reelection landslide in 2022.
The Fed didn’t pull the trigger, but they didn’t do anything to mitigate Congress’ bad decision making either. They spent a year with their head in the sand pretending inflation was ‘transitory’ (wtf does that mean anyway?) before raising rates by any significant amount—which they still haven’t really done.
Add to that the corporate tax cuts a few years ago which are of a similar scale (though harder to account for), and didn't even have the excuse of pandemic to support it.
I do think that there's a bit much teeth gnashing and blame flinging going around in any case - a 10% inflation for 1 year after years of low inflation isn't the end of the world - if it stays at that. And some of this was almost inevitable given all the shocks of the past few years - how realistic was it that there wasn't going to be some economic hit down the line?
It seems rather plausible that earlier, higher rate raises might well have caused a recession; and had the pandemic exit played out only slightly differently and the fed raised rates earlier - we might be making the opposite complaint now. Even now, it's not like higher interest rates won't cause damage. And to the extent that some of the inflation is due to supply shocks, raising interest rates won't even do as much as you'd like, all while causing more damage than is ideal.
By contrast, it's worth noting that the eurozone interest is still at -0.50%, and they're talking of months to even return to 0. The challenges may not be identical, but it's no coincidence they've not rushed to raise rates so far either.
Uncle Sam has been on a unique path because of Mr Biden’s excessive $1.9trn fiscal stimulus, which passed in March 2021. It added extra oomph to an economy that was already recovering fast after multiple rounds of spending, and brought the total pandemic stimulus to 25% of GDP—the highest in the rich world. As the White House hit the accelerator, the Fed should have applied the brakes. It did not.
That's typical of governments going through a deleveraging. Ray Dalio's "How the economic machine works in 30 minutes" video on youtube explains the situation quite well. That said though, the money obtained for this stimulus was largely printed by the Fed (a horrible decision IMO).
But I wouldn't put the blame for this mess solely on the Fed and government. Really it's society's collective greed, self-centeredness, incompetence, and financial irresponsibility of overpromising/can-kicking for several decades that's got us here...
Everyone is focused on the rates, but what about the 2T USD of mortgage backed securities on the Fed's balance sheet? They promised to wind-down their holdings of MBS but they have persistently held them all the while housing prices have continued to sore.
Another thing that bothers me about this is the fact that they don't even include housing in their inflation measurement... despite owning MBS!
The Fed doesn't use the CPI, they use the PCE. The PCE is calculated based on rental prices, not home prices. I should have said more accurately that they don't include the PRICE of homes in their inflation measurement. It seems like it would be quite important when you are holding 2T in MBS.
The “price of housing” is also a very large proportion of the PCE. I am not sure what percentage of the total it makes up this year (maybe you can figure that out with more searching), but I believe it is broadly comparable to CPI.
The PCE is computed by the Bureau of Economic Analysis (part of the Commerce department; BLS is part of the Labor department). Like the CPI, the PCE includes both Rental of tenant-occupied nonfarm housing and Imputed rental of owner-occupied nonfarm housing among its categories. The estimates of these (and other) individual categories in the PCE are directly lifted from the CPI. The main thing that differs between the two in my understanding is how the categories get combined.
Property values are not really directly relevant for an inflation index, because property values are not directly reflected in monthly personal expenditures. What matters (and gets counted) is the price of people’s housing-related expenses.
> As noted in Chapter 2 purchases of newly constructed housing are treated as private fixed investment rather than as consumption expenditures in the NIPAs, and the stock of housing is treated as fixed assets. The housing stock provides a flow of housing services that are consumed by persons who rent their housing and by persons who own the housing they occupy (referred to as “owner-occupants”). In the NIPAs, owner-occupants are treated as owning unincorporated enterprises that provide housing services to themselves in the form of the rental value of their dwellings. Thus, PCE for dwelling services includes both the monetary rents paid by tenants and an imputed rental value for owner-occupied dwellings (measured as the income the homeowner could have received if the house had been rented to a tenant). This treatment is designed to make PCE (and GDP) invariant to whether the house is rented by a landlord to a tenant or is lived in by the homeowner.
If you ask journalists everything is mono-causal all the time. There are several factors that all play a significant role imho. FED not raising rates when the economy was already in full recovery is one. Then excessive fiscal spending during Corona while the economy was partially shut down. And then of course the war in Ukraine. Another factor China's ridiculous No-Covid strategy (if it's even about Covid).
China's zero Covid strategy has saved, and continues to save, millions of lives.
Over any reasonable time period, the economic benefits of having a healthy populace out weigh the temporary cost of lockdowns. Our current problems with inflation may well be in part caused by workers unable to work due to chronic illness caused by Covid (and indeed the endless rounds of acute illness too).
We'll only solve inflation when we solve the Welfare state. We need to abandon unemployment and single-parenthood payments, and raise the pension access age to 70 alongside a privatization of social security.
This will force people back into the workforce and free up capital so that we can friend-shore supply chains.
Funny that after almost one-and-a-half decades of excessive monetary expansion the reasons for inflation lie so far outside the realm of monetary policy: zero-Covid policies in China that have lastingly disrupted global supply chains, a terrible war that has bogged down 40% of the world's grain supply, highly justified sanctions that drive up energy prices, and a domestic workforce that has become disillusioned about the work treadmill. The Economist very liberally glances over those issues for the sake of a strong-hitting headline and a compelling story.
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[ 2.8 ms ] story [ 240 ms ] threadThe Fed‘s basically got binary options here: Keep inflation from ruining lives and savings or saving the economy from collapse. Or trying to do just a bit of both.
I’m rather asking myself: When you‘ve got a water pipe with a valve you can just open and shut and the leakage getting larger and larger with less and less water arriving at the end, is it the one operating the valve doing the historic mistake?
In the Japan scenario that the US is following, the US is just now getting to where Japan was in the mid 1990s. And that's Japan without the global reserve currency and the numerous financing benefits that go with it.
The US has an enormous asset base to debase against, to eat, before it arrives at truly severe problems. It has plenty of spare taxing capacity across every income bracket.
And as the feds crush the income brackets with higher taxes over time, socialized healthcare will continue to creep up the income bracket, taking up more and more of the market (out of necessity due to cost; middle and low income brackets will lose more of their disposable income to taxation, healthcare will become that much more of a burden).
Interest rates will remain exceptionally low for decades to come. The average rate the US Govt pays on its debt will continue to sink lower over time, as the mountain of debt soars higher. That can continue until at least the range of $60-$90 trillion in public debt (1% - 1.5% on $60t-$90t is where they'll push it to over time). 1% on $60t is affordable right now. The skeptics will proclaim such low rates on such a giant pile of debt is impossible - it's not; they would have claimed (circa the mid 1990s) that what has already happened would be impossible too. Courtesy of Japan, we already know what can and will happen, and so does the Fed (even though they constantly lie about it).
The massive debt accumulation (in government and corporate) will take care of a lot of the inflationary pressure that would otherwise be present, courtesy of mediocre growth (the debt accumulation and maintenance robbing the economy of capital it needs to grow faster; the debt acting as a heat sink, which is exactly what it has done to Japan).
This inflation spike is transitory (the people saying that were too early on the duration aspect though and so they got mocked for it), the labor market is about to crack, growth is at recessionary levels, crypto has crashed, bubbly stocks have crashed. The housing market is going to get hit (although it won't be like the great recession) as the labor market gets rattled, people will shift that much more conservative, and blue chip stocks will get hit harder (blue chips like eg KO, which have largely avoided the damage in the market so far). With mediocre growth and a broken labor market, the inflation wave won't be sustainable over a longer time frame. It's better to think of the present inflation wave as a large one-off reset to higher prices (fallout from the various effects and choices during the pandemic), rather than a persistent ongoing event. That type of inflation burst event might happen from time to time over the coming decades as a consequence to various programs the US Govt and Fed run to try to spur the economy and manage high debt levels. For example, as the economy continues to weaken, the Biden Admin will start talking about trying to do another stimulus shot and or infrastructure.
Corporations have rapidly sapped their pricing power to counter inflation. Consumers can only take so much of that, and I believe we're clearly seeing weakening by the consumer in their willingness to keep absorbing huge price hikes on consumer goods. The corps will begin slashing the human cost soon (both delaying hiring and firing) and pushing automation more (eg if your local Walgreens or CVS doesn't have a self-checkout, it soon will; if your local McDonald's doesn't have digital kiosks, it soon will; they'll push labor cost onto the customer wherever they can).
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edit:
Someone (greyed out account) replied with this, and I thought it was worth touching on:
> there's no way you can convince me healthcare costs will go up if we kick the capitalists out of the industry
Well that's not what's going to happen and it certainly won't be a smooth event (the US wakes up one day with a shi...
Exaggerated, your premise rests on: the US is not exactly like the Japan scenario, it's 98-99% like the Japan scenario. Point being, that tiny population expansion is trivial and will be mostly gone soon anyway.
The population addition in question is majority lower income, lower education oriented in numbers. The US has an inverted immigration system vs eg Canada or Australia (they focus on higher income, higher education, skill-based immigration). That fact further debases the potency / value of the population expansion. US education has been eroding for decades in terms of quality, so those lower income, lower education new immigrants are entering the US at a particularly mediocre time for their purposes (and they'll also simultaneously run into the automation, robotics, AI buzzsaw that is in the first or second inning; further devaluing what that population expansion brings to the table).
I was very clearly speaking about the overall US immigration system and how it's structured.
Foreign STEM grads quite obviously fall into the higher income, higher education, higher skill grouping that (per my prior reference) Canada and Australia prefer to focus the majority of their immigration on (whereas the US does not focus its immigration in such a manner).
That's absolutely not true, and it sounds like 101 xenophobia. Immigrants in the U.S. are significantly better educated than U.S. natives.
Ref: https://www.pewresearch.org/fact-tank/2020/08/20/key-finding...
> Educational attainment varies among the nation’s immigrant groups, particularly across immigrants from different regions of the world. Immigrants from Mexico and Central America are less likely to be high school graduates than the U.S. born (54% and 47%, respectively, do not have a high school diploma, vs. 8% of U.S. born). On the other hand, immigrants from every region except Mexico, the Caribbean and Central America were as likely as or more likely than U.S.-born residents to have a bachelor’s or advanced degree.
Not the OP you're responding to but your own source disagrees with your assertion. Relevant quotes above, emphasis mine. Also, I'm not against immigration but it gets old seeing accusations of xenophobia when someone is trying to have a reasonable conversation about the very real macro-level challenges involved in immigration. Stifling this sort of discourse also ends up being a disservice to people that have worked very hard to immigrate to the US as it can lead to people sweeping under the rug the challenges people will face when arriving.
I support single-payer, but it's not going to solve the US health care cost problem - and "solutions" to it are likely not going to be pleasant. Likely, in the practical world, whatever cost control ultimately ends up being imposed on whatever system we have 20 years from now is going to make health care worse. Indeed, what makes US health care so bad right now is in part ineffective cost control measures.
[1] https://www.cbo.gov/publication/56571 [2] https://www.pgpf.org/budget-basics/medicare#:~:text=Medicare....
What it will do, is slow the expansion of cost vs what we'll see in the private sector coverage. That slowdown will be courtesy of the massive-scale, centralized, top-down pricing push-back capability that the government has (and has very strong incentive to use as the years go by, given the fiscal situation).
The cost per capita of the two systems will split apart more and more as time goes by.
The government might enact further measures which will likely have consequences not unlike the current policies
The production of oil and supply chains is not even close to 2019 levels. Electronic manufacturing and tooling needs 1-2 years to catch up to 2019 (current) demand. Scaring investment does not help.
It is almost like the system should have automated rules in place to prevent this from being possible.
I say that inflation was too low 1990-2020 not because they mismeasured it, but because the Fed kept the rates too high.
The CPI basket undermeasures volatility, but it's not bad at measuring inflation. Not great, but every alternative basket I've seen proposed has been worse.
Was it totally preventable? Not likely. Did it have to be so precipitous and ruinous? Nope. They could have come correct and could have adjusted rates and have encouraged people back to work but dialing back the stimulus sooner --slowing the money printer.
The Fed can’t control government spending. Massive government spending, funded by new money, caused inflation. The Fed can’t do much about that. If anything Powell consistently advocated for a more balanced federal budget precovid.
Keystone XL is a zombie project which abandoned by the development/infrastructure company. It had been stuck in regulatory review and litigation for a decade.
Environmental reviews by both the Obama Admin and Trump admin state that Keystone XL would not have lowered gasoline prices. You are pretending like all oil/gas products are fungible, when in reality most refineries in the US are not capable of refining all raw product. Hence “Energy Independence” is purely a marketing term and we still need to export lots of raw material and import other kinds of raw material to match what we are capable of refining.
I think it’s reasonable to say that the majority of the planet shutting down during the pandemic has at least as much to do with inflation as the fed’s monetary policy, if not much more.
Resuming economic activity after shut downs (and the habits the shut downs changed) is taking time. There is no obvious natural experiment to tease out how much is caused by CB interest rates and how much is fiscal policy. Most of the countries that did one also did the other.
Also, data points on these issues are gathered monthly (if that often), so current analysis will miss a lot in the “fog of war” until there is more data to analyze.
How is US government spending causing 8% inflation in Germany?
It's almost like this is a global phenomenon caused by supply shocks and price gouging of essential commodities.
>Massive government spending, funded by new money, caused inflation.
Someday, people will understand that central banks issue less than 8 percent of the circulating money, and that government debt is just another way of financing retirement pension funds.
So only in the most narrow sense is it even possibly true that "the US did not have inflation when it did not have fiat money": if you ignore the times when convertibility was suspended, it becomes a slightly more accurate statement, but still not true as it ignores inflation soon after the founding, large deflationary periods in the early and late 1800s, and subsequent inflationary periods prior to WW I. So you have to ignore convertibility suspension and the inflation and deflation in order to argue that there was no inflation or deflation.
The one iron-clad law of "non-fiat" currencies: eventually they will become fiat currencies.
This amply proves my point.
The inflation was a net zero from 1800 to 1914.
Fundamentally, you can try to control expectations by feeding biased projections, but you have to maintain a certain signal-to-noise ratio in doing so, or else the market will learn to ignore you. You can feed the market inaccurate projections only by spending down your accumulated credibility, which has to be bought back later with accurate projections.
(This applies in real life, too. It takes trust to be believed, and it costs trust to mislead).
"If a new inflation target is too ambitious, and the central bank fails to attain it, the central bank may lose its credibility, which may render less effective any other policies it pursues." [https://www.federalreserve.gov/econres/notes/feds-notes/rais...]
If the market has learned to ignore the Fed, then it becomes very costly for the Fed to achieve accurate projections and earn back its credibility, because it can't rely solely on influencing expectations to achieve its results. It is left only with backing up its bark with a real bite.
True.
> Massive government spending, funded by new money, caused inflation. The Fed can’t do much about that.
False. The Fed controls the money supply - that is, the creation of new money. (Congress doesn't, thank God.) If the Fed didn't increase the money supply, the government would have to borrow more on the open market, or else tax more. The first might cause visible issues earlier; the second would be politically expensive.
I tend to agree with your sentiment, but wanted to point out there are obvious issues with our analysis.
I have heard pretty good arguments for the idea that supply and demand are still trying to find a new equilibrium in the post COVID demand shock.
What is the specific criteria that was used to reject transitory?
I tend to be skeptical of anyone who accuses others of lying when there are obviously simpler reasonable explanations: it’s hard to predict how the entire economy will react to turning off the spigot.
That proves that the administration knows it has an optics issue, not that inflation isn’t transitory. Inflation is currently the number one issue on most voters minds.
I don’t doubt that inflation exists. I doubt that a substantial portion of it is related to issues that won’t resolve themselves as the economy renormalizes post-COVID and buying habits return to something like pre-COVID.
It's number one because the admin tried to bury the issue by cliaming it was transitory while many outside DC and the Whitehouse were saying, you can't print money, do the BBB to the tune of trillions (where even Yellen balked) send out stimulus cheques, press for a $15 minimum wage (this should have been gradual), keep rates low AND expect there not to be inflation. But they said, nah, you're being chicken little, relax.
Covid did stress the economy, but it would do the opposite of inflation, if they had not stepped on the gas. It dampened demand. It also put some people out of work and also encouraged some to leave the workforce early.
I agree that many outside of DC jumped on Larry Summers’ bandwagon and are screaming that it was never transitory. But that still isn’t proven. And lots of those people happen to be political adversaries of Democrats, so they have additional reason to try and pin another problem on this president, whether it is his fault or not (which is what your Democrat wish list of things that never happened/passed so can’t affect inflation looks like). I would also note that you are mixing fiscal and monetary policy as if the White House admin had control over either.
Printing money (expanding the M1 money supply at least 4x) and a near zero interest rate environment happened for a decade after 2008 with stubbornly low inflation. That doesn’t necessarily lead to inflation.
COVID didn’t dampen demand for more than a month. It changed where demand was aimed. Money that pre-COVID went to restaurants, concerts, and travel was aimed at different goods like home improvements, in-home entertainment, and crypto/stonks. Inflation didn’t show up when households were thrown $1600, unemployment insurance claims saw richer payouts, and PPP was issued. It happened after buying and spending habits changed when people came out of hibernation and were spite spending.
Again, I’m not saying inflation isn’t transitory. I’m saying I don’t think we can know for sure until the supply-demand mismatches created by COVID lockdowns and behavioral changes have returned to some equilibrium. Only then might we have enough info to be sure, especially because transitory opponents will not set goal posts for the definition.
The only one solid piece of evidence I see for some kind of sustained inflation was the Great Resignation, where people were changing their desires and expectations for work and life. Combined with very little immigration since Trump’s inauguration, and we have not enough supply of low paid labor.
If you want to point a finger, maybe point it at the politician who threatened the Fed chair for not setting negative rates 2 years ago.
We can also blame the politicians who cut taxes in the longest, largest bull market for financial assets in history.
IIRC, CPI inflation metrics do tricky things with rents versus mortgages, so cost of living can appear very different for renters versus homeowners, even in the same neighborhood.
CPI is well defined and has a clear construction, as does PPI and GDP deflator. The 'real number' is something people seem to bring up as a signal that the beaurocrats an politicians are lying to us, but it is not well defined or defined at all, so it's impossible to disagree with.
There are reasonable arguments to make that CPI is insufficient for measuring everything that we spend on (it underweights healthcare, gas, college costs, and lots of luxury investments like stocks and artwork). There are also reasonable arguments that cost of living in some regions is growing faster than 8% (the actual CPI number obviously isn’t homogeneous across the entire country).
Also important to note that there is no “intrinsic value” in dollar terms for any good. Everything is a negotiation of how much we want a thing. If you insist on Quaker Oats oatmeal instead of generic oatmeal (a personal preference), you might experience a higher rate of inflation than others who are more amenable to substitutes.
Nobody should have the power to subvert the meaning of time.
We take the ministry of truth seriously (“the past can be changed”) and get scared by that. Saying thay time is worthless is more or less as grave.
While true, I think it is fair that people broadly share an expectation that time value of money has a positive value and that central banks shouldn’t be subverting market forces to eliminate all opportunity costs of capital.
It’s also the job of central banks to manipulate capital markets (“rows in a database”) to meet their mandates and desired outcomes.
https://www.visualcapitalist.com/700-year-decline-of-interes...
Usury is bad and there are other ways to finance underwriting and the other socially useful activities banks perform.
[1] Currency issuers can always service debts in the currency they issue of course. Those liabilities are so operationally different from household debts though that they probably ought to be called by a different name altogether.
If tangible assets have rental fees, then why doesn't money?
As an example, rent to own is a reasonable and moral way to structure a real estate transaction without interest. It’s all about sustainability. Lending at interest requires borrowers, in aggregate, to acquire more funds than the monetary system can provide. It’s clearly immoral to impose conditions that are impossible to meet.
[1] https://www.newadvent.org/summa/3078.htm
Interesting take, but isn't setting an interest rate doing exactly that, whatever that rate is?
This is why, the Islamic approach is the most superior one: no lending money with interest, period. This means at least two things:
(1) Lending money becomes an act of charity, since you cannot profit off of it.
(2) You want to tap into time value of money? Invest it in a proper risk sharing manner that is fair to all parties engaged.
It would be a very different world had we implemented this approach.
Imagining that folks will ignore that is futile.
My suspicion is that the FED will mostly be choosing to inflation to run its course rather than raising rates too aggressively, and they are trying to pull off a balancing act. Once the current panic subsides, probably things will stabilize.
What other posters are telling you is that there's no such thing as letting inflation "run its course." What actually happens is that high inflation becomes baked into the normal operation of the economy, at which point it is extremely difficult to get rid of (i.e. not just raising interest rates above the inflation rate).
As a side effect, the government loses the ability to issue bonds, as there will be no new buyers.
The only way to prevent this is to make sure interest rates do not stay too low below inflation for too long, and in the end, iterest rates may have to go above inflation to actually get it back down.
'Transient' was the word used not long ago.
Then came the half-hearted small rate raises.
Now the piper must be paid.
So in combination with inflation that will not slow down as much as it needs to, the trust which made the U.S. dollar the global reserve currency in the first place is also eroding.
Inspired by the final statement from the article:
> "Inflation that is stable and modestly above 2% might be tolerable for the real economy, but there is no guarantee the Fed’s stance today can deliver even that. And breaking promises has consequences. It hurts long-term bondholders, including foreign central banks and governments which own $4trn-worth of Treasury bonds. (A decade of 4% inflation instead of 2% would cut the purchasing power of money repaid at the end of that period by 18%.) It might add an inflation risk premium to America’s cost of borrowing. And if even America broke its inflation promises in tough times, investors might worry that other central banks—many of which are looking over their shoulders at indebted governments—would do the same. In the 1980s the recessions brought about by Paul Volcker’s Fed laid the foundations for inflation-targeting regimes worldwide. Every month inflation runs too hot, part of that hard-won credibility ebbs away."
It's a weird feeling to understand that there's little that can be done, because so many of the issues we're dealing with were locked in carbonite many decades ago, e.g. Social Security unfunded liabilities. It's like a game of musical chairs, only there is only one chair left, but 27 people are still circling around it, and every few seconds another person shows up to play.
Social Security isn't unfunded. The main issue there is that it invests the money in US treasury bonds. As those bonds mature they reinvest in new bonds. That's all find and dandy, but it creates a system where SS is constantly "buying" bonds and the treasury is constantly "paying" SS. This has historically looked like a flow of money from SS into the treasury. As the boomers retire, the net flow will have to reverse, meaning the treasury will have to pay back a bunch of money that it borrowed from the Social Security administration. That's fine, they have several trillion dollars invested. The big issue is that congress has made a habit of spending other peoples money and sees a huge hole in their budget because of this situation.
Social Security is not an "entitlement" it's more like a contract and congress keeps wanting to default on their end of the deal. The amount a person gets from SS is not much more than their lifetime contributions - the average rate of return for an individual is very low, but that's not what the "problem" is.
One of the symptoms of autism is the inability to recognize sarcasm (<http://www.healthcentral.com/autism/c/1443/162610/autism-sar...>) without the help of idiotic, illiterate signals like "/s".
https://news.ycombinator.com/newsguidelines.html
Edit: I don't mean to pile on, but please see https://news.ycombinator.com/item?id=31749192 also. You have unfortunately been breaking the site guidelines a lot lately.
It's a fine line between sacrificing the future "economy" to save lives now.
We will have to see if overall life loss is less or more due to the human interventions during covid mania.
When mothers die giving bird, car accidents become mortal, heart attacks are not treated because there are no beds in the hospital people tend to revolt. But because it did not happen you seem to argue that the remedy was not needed.
Any article that talks about the Fed's response without talking about Powell's reconfirmation is really not worth reading.
Once his job was secure, inflation was priority and he set out to destroy demand to reduce wages and the ease the burden on the broken supply chain that he no tools to fix.
A balanced outcome is always a function of both supply and demand
It is fairly well known that one of the predictors of future inflation is the belief in it - - a self-fulfilling prophecy.
The Fed does not have any tools to address businesses who take advantage of people believing that the prices should be higher to raise their price and in the short term their profit.
The fed has one Cannon to use, reduce or expand the money supply, and it only hits one of the three sources for inflation
If you want short-term inflation protection, add some commodities to your portfolio.
BTC will trend perfectly inline with stock valuations as a function of excess liquidity, kind of indicating they are not what they are supposed to be.
They are a fun speculative instrument, when things get tough, people stop pretending and move onto other things.
That may change, but unlikely.
I see a future crypto 'mapped' to the real world in the future some how, not fully but only partically decentralized, that could work.
He said virtually the same as you..
I said 'pay' I meant to say 'invest'.
BTC should be counter cyclical to stocks, but my bet is that they won't be.
It'll be up during 'fun times' and down during 'scary times' whereas by design it should be the opposite. That could change if something about BTC becomes institutionalized, i.e. everywhere starts accepting BTC for Oil or something but I doubt that will happen.
Probably not stocks, but maybe actually some value stocks.
My point is just that BTC is not a safe haven from stocks.
It is the snakeoil people who promised that and gullible idiots believed/memed/tiktoked that.
A plot of land in rural Arkansas has been stable irrespective of Money Supply. The value of grain of sand on the beaches of South Carolina have been same.
OTOH, Bitcoin is not an hard asset :)
Hard/Soft classification are used by naive doomer-preppers (aka Peter Schiff). Assets are things that produce cash flow, rest is speculative. That's why the beanie baby (a "hard asset") that you bought in 1999 hasn't beaten inflation
If nominal, Venezuelan bolívars are the way to go.
If inflation-adjusted, maybe you're on to something, but still depends how you measure inflation.
At some point if/when this course of action becomes untenable due to recession/unemployment/too high interest rates given amount of debt in economy, and Fed reverses course (which they did much earlier last tightening cycle in 2018 when markets tanked), those two assets should rise again. Gold particularly falls when real interest rates rise. But, it is likely they are more serious about taking assets down and essentially inducing a recession given the persistent high inflation. The result of fighting that to any real degree means everything keeps going down...which is literally their goal (the reverse wealth affect to slow inflation).
Right now unemployment is under 4%. The Fed has a lot of leeway to raise rates before what they are doing affects employment, and I'm not sure at all that they will allow unemployment to get too high, if they can help it.
A friend ran a successful small investment fund, and still went out of business during the last down turn because all his clients had to pull their money out to cover losses elsewhere.
https://www.youtube.com/watch?v=Q-5US4J03Wo 13:00 mark.
Interest rates being higher means: get your money out of that speculative crap and into something where you can take advantage of the higher rates.
But also because Bitcoin isn't what its advocates claim it is? It's speculation, not currency. Not a hedge against inflation.
In fact it's inflated worse than USD. Worth 40% less than it was a year ago.
https://finance.yahoo.com/quote/DJP
https://www.wsj.com/articles/trump-complains-about-rising-in...
https://www.nytimes.com/2019/09/11/business/economy/bonehead...
Not that the Fed doesn't deserve criticism, because they do, but the public would be pissed about many of the measures that combat inflation as well, and the politicians would make sure they know who to blame (hint: not themselves).
Eh, not entirely. There's also a war going on, which has had serious impacts on the food an energy markets. Plus the supply chain is still all out of whack due to COVID. Neither of those is due to "out of control government spending and printing of money."
The people who reflexively complain about "out of control government spending and printing of money" have predicted 12 of the last 1 bouts of inflation.
1) The US could have pursued a COVID policy of “Kill Grandma, Save the Dollar,” and still had supply chain issues. We live in globalized economy, and China's COVID policy is just as significant to the supply chain as the US's (or even more so).
2) Even if the US's COVID policy did cause inflation, a policy along those lines may have still been the right one, given the circumstances. People monomanically focused on one or a few metrics (like inflation) usually advocate shit policy that's bad for everything else.
The supply chain is affected way more by what China does than by any other country. I do not think that supply chain and inflation problems are just happening in the USA but world wide.
https://m.youtube.com/watch?v=b1JlYZQG3lI
This phenomena is so concrete that it was seen in the gold rush era, and even when tobacco leaves were used as currency in the south. There's plenty of historical data to back this up.
- in the summer of 1995, the Clinton administration admitted that “balancing the budget is not one of our top priorities.”
"It worked quite well" meaning:
"We have a balanced budget today that is mostly a result of 1) an exceptionally strong economy that is creating gobs of new tax revenues and 2) a shrinking military budget." - Stephen Moore
https://archive.ph/OD4nl#selection-1643.78-1643.91
Whoever was to blame, the issue is that politicians have been disconnected from spending constraints for too long. There are no controls that impact them when they fail to perform one of their basic duties. Deciding how to spend tax revenue has morphed into deciding how to spend future revenue across all strata of politics (local to federal). The 91fwy express lanes from 1994 are STILL tolls, which was supposed to be converted to additional freeway lanes decades ago, based on the initial project. Nope, money in the hand and promises of money in the future, is what the cities want. From this, we get wasteful slush-fund industries (eg lotteries, etc).
In general, lowering demand for goods will decrease upward price pressure.
Unfortunately, rapid rate increases are needed. The downside will be painful. The crying, screaming, bargaining and delusion we are seeing is normal as money gets expensive, asset values drop and times get harder.
Interest rates should be returned to their norm, around 5%, for sound resource allocation (i.e. the time value of money is priced correctly).
Fiscal policy, specifically wealth taxes, should be used to cushion low and middle incomes from this painful readjustment.
"Soak the rich" is a nonstarter if you're after tax revenue (as opposed to intentionally stoking widespread social envy for political gain), and everyone knows it. The middle class is where the real money is.
Solving tax evasion is simple. All capital boils down to something you can put your hands on.
A budget takes time to make, vote on and spend (or not spend). To be effective it must also align with monetary policy. Changing rates has a much quicker effect.
By the time Congress agrees on what to cut the inflation might even be low - due to Fed action, a recession, or repairing of the post-Covid logistic issues.
It’s the same play Tories have run in the UK, for much the same reasons—winning minorities and working class rural people away from Labour. And it’s resulted in exploding government spending there too.
Trump wasn’t president in 2021. Why didn’t the FED act to raise rates then?
- an un-clean reopening where many states just dropped restrictions and let people go all of a sudden.
- combined with snarled supply chains.
- combined with a labor shortage.
And then on top of that:
- a war between a major oil exporter (Russia) and a major food exporter (Ukraine).
- COVID lockdowns in China making goods yet more scarce.
The Fed was in a tough spot but made good calls given the information available. Then the new stuff came in and all of a sudden we found ourselves in a pickle. The issue isn't IMO inherently too much money, it's suddenly too little supply.
All the Fed can do is nuke demand. We will not have a good time.
As we know, conservatives in Congress (which includes a bunch of Democratic members) refuse to pass taxes unless they fall disproportionately on the poor. Thus, we are unlikely to see a real resolution to this problem, just more can kicking.
I think there will be more willingness to negotiate across the aisle as inflation/fuel continues to heat up.
Also inflation is primarily driven by middle/lower class having higher disposable income, not upper class. The propensity to spend a marginal dollar goes up significantly, the poorer you are. If Jeff Bezos sells $1B of amazon tomorrow, it's likely disinflationary in practice because he's taking that money from buyers and not spending it at the same rate
It's possible that forced selling of assets through new tax schemes could be disinflationary by routing money from buyers to the government via taxes. But then again, most of the money in equities is owned by wealthy/low propensity to consume people
You can blame the Fed on that one
You have to clean up the market of consolidation and tax the money away from the wealthy, who got 85% of the stimulus and used it to buy up the economy.
Seems pretty fair and obvious to me. Imagine any of the senate leadership actually proposing that though, lol
>> and Democrats are searching for villains to blame, from greedy bosses to Vladimir Putin.
How about congress look in the mirror and all the free money they've been handing out AND spending.
On a related note, why does boosting the economy always involve borrowing money - either on the consumer side or the government side? We never talk about debt (deficit isn't debt, it's the rate of change of debt). Fiscal responsibility is always pushed aside for short term goals.
We've got a brewing war in China.
We've got an active war in Eastern Europe.
People literally cannot feed their infant children.
Is there anybody who seriously and honestly believes that Joe Biden should be in charge of assembling a team to solve these issues? Does anybody seriously believe that people like Pete Buttigieg should be in charge of doing anything to help alleviate these supply chain and energy problems?
...the Coronavirus Preparedness and Response Supplemental Appropriations Act (2 trillion)
...Families First Coronavirus Response Act (FFCRA)
...Coronavirus Aid, Relief, and Economic Security (CARES) Act
...Lost Wages Assistance (LWA) Program
...the 12/20 CAA
...the American Rescue Plan Act (1.9 trillion)?
Perhaps I'm being a tad cynical but this seems a lot like scapegoating so Congress can escape liability for legislation it thought (wrongly) would lead to a glorious congressional reelection landslide in 2022.
I do think that there's a bit much teeth gnashing and blame flinging going around in any case - a 10% inflation for 1 year after years of low inflation isn't the end of the world - if it stays at that. And some of this was almost inevitable given all the shocks of the past few years - how realistic was it that there wasn't going to be some economic hit down the line?
It seems rather plausible that earlier, higher rate raises might well have caused a recession; and had the pandemic exit played out only slightly differently and the fed raised rates earlier - we might be making the opposite complaint now. Even now, it's not like higher interest rates won't cause damage. And to the extent that some of the inflation is due to supply shocks, raising interest rates won't even do as much as you'd like, all while causing more damage than is ideal.
By contrast, it's worth noting that the eurozone interest is still at -0.50%, and they're talking of months to even return to 0. The challenges may not be identical, but it's no coincidence they've not rushed to raise rates so far either.
—
Uncle Sam has been on a unique path because of Mr Biden’s excessive $1.9trn fiscal stimulus, which passed in March 2021. It added extra oomph to an economy that was already recovering fast after multiple rounds of spending, and brought the total pandemic stimulus to 25% of GDP—the highest in the rich world. As the White House hit the accelerator, the Fed should have applied the brakes. It did not.
—
I didn’t see any of the others mentioned.
But I wouldn't put the blame for this mess solely on the Fed and government. Really it's society's collective greed, self-centeredness, incompetence, and financial irresponsibility of overpromising/can-kicking for several decades that's got us here...
Another thing that bothers me about this is the fact that they don't even include housing in their inflation measurement... despite owning MBS!
Also the CPI is computed by the Bureau of Labor Statistics, not the Federal Reserve.
The PCE is computed by the Bureau of Economic Analysis (part of the Commerce department; BLS is part of the Labor department). Like the CPI, the PCE includes both Rental of tenant-occupied nonfarm housing and Imputed rental of owner-occupied nonfarm housing among its categories. The estimates of these (and other) individual categories in the PCE are directly lifted from the CPI. The main thing that differs between the two in my understanding is how the categories get combined.
Property values are not really directly relevant for an inflation index, because property values are not directly reflected in monthly personal expenditures. What matters (and gets counted) is the price of people’s housing-related expenses.
> As noted in Chapter 2 purchases of newly constructed housing are treated as private fixed investment rather than as consumption expenditures in the NIPAs, and the stock of housing is treated as fixed assets. The housing stock provides a flow of housing services that are consumed by persons who rent their housing and by persons who own the housing they occupy (referred to as “owner-occupants”). In the NIPAs, owner-occupants are treated as owning unincorporated enterprises that provide housing services to themselves in the form of the rental value of their dwellings. Thus, PCE for dwelling services includes both the monetary rents paid by tenants and an imputed rental value for owner-occupied dwellings (measured as the income the homeowner could have received if the house had been rented to a tenant). This treatment is designed to make PCE (and GDP) invariant to whether the house is rented by a landlord to a tenant or is lived in by the homeowner.
Over any reasonable time period, the economic benefits of having a healthy populace out weigh the temporary cost of lockdowns. Our current problems with inflation may well be in part caused by workers unable to work due to chronic illness caused by Covid (and indeed the endless rounds of acute illness too).
This will force people back into the workforce and free up capital so that we can friend-shore supply chains.
https://www.theatlantic.com/ideas/archive/2022/06/what-is-ca...