Today’s inflation is not a repeat of the 1970s(awealthofcommonsense.com)
awealthofcommonsense.com
Today’s inflation is not a repeat of the 1970s
https://awealthofcommonsense.com/2022/11/why-todays-inflation-is-not-a-repeat-of-the-1970s/
99 comments
Seems like both post-COVID supply chain effects and the Ukraine war are fairly logical temporary effects that aren't representing fundamental limits on supply. Hence measures taken should be seen in the light of managing a short term, temporary effect on supply of energy and labor with the goal of ensuring inflation doesn't become self-reinforcing - rather than modulating the medium to longer term economy.
The problem is that those aren't the reasons for the inflation. The increase in the money supply is. But crafty politicians have blamed everything else in order to try stay in power.
The measures they're taking, increasing interest rates for a prolonged period of time, are to correct the inflation caused by the expansion in the money supply. They just can't admit it.
The measures they're taking, increasing interest rates for a prolonged period of time, are to correct the inflation caused by the expansion in the money supply. They just can't admit it.
It’s worth noting that OP (who is not a politician) does discuss money supply, including a chart that shows how M2 money creation spiked when COVID hit but has now returned to the pre-pandemic growth rate. OP’s core thesis is that today’s Federal Reserve understands stagflation and will avoid the mistakes of the 1970s, similar to how the 2008 Federal Reserve understood the Depression and avoided the mistakes of the 1930s.
I want to believe that, but metal prices aren't tracking the way I'd expect if it was just excessive money supply. Much, or even most is money supply, but it looks to me like we still have actual scarcity issues.
Precious metals? They’re tanking because the alternatives (like government bonds) are suddenly looking more attractive.
Flight to quality is the industry term. I was working Wall Street 2008 in the crash in bonds and the phones were ringing off the hook for tax exempt TX munis.
Probably happening again.
Probably happening again.
That's a childish view of how money works and what causes inflation.
I would call it a simplified rather than a childish view. “Increased money supply causes inflation” is an accurate macro view of how money works, with macro meaning it’s a high-level model.
The micro view is of course more complex. If you drill down on how extra dollars created by the fractional reserve banking system flow through our economy, you’ll see the money sometimes sits idle in bank reserves without causing immediate inflation, while other times it might flow into investments and pump up the stock market, and then spill over into well-funded startups that bid up engineer salaries and their local real estate market, and so on… The inflation can be uneven and proceed with delays, but the increased money supply does create an overall tidal pressure lifting prices up.
The micro view is of course more complex. If you drill down on how extra dollars created by the fractional reserve banking system flow through our economy, you’ll see the money sometimes sits idle in bank reserves without causing immediate inflation, while other times it might flow into investments and pump up the stock market, and then spill over into well-funded startups that bid up engineer salaries and their local real estate market, and so on… The inflation can be uneven and proceed with delays, but the increased money supply does create an overall tidal pressure lifting prices up.
"“Increased money supply causes inflation” is an accurate macro view of how money works"
It isn't though is it.
How does $100 in a drawer cause inflation? That is the correct analogy or you wouldn't see the $100 on the balance sheet. It has to be saved to show up. Otherwise it would pass by loan repayment and taxation points and disappear as balance sheets contract.
Inflation is always, everywhere, a lack of supply capacity. Excess capacity to supply is what keeps prices down via market competition.
"You’ll see the money sometimes sits idle in bank reserves without causing immediate inflation"
Bank reserves are assets of banks that sit in Central bank accounts. You or I can't hold them because we can't have central bank accounts. They can only ever be passed to other banks.
Your view of banking is completely wrong. Try this explanation from the Bank of England. https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
It isn't though is it.
How does $100 in a drawer cause inflation? That is the correct analogy or you wouldn't see the $100 on the balance sheet. It has to be saved to show up. Otherwise it would pass by loan repayment and taxation points and disappear as balance sheets contract.
Inflation is always, everywhere, a lack of supply capacity. Excess capacity to supply is what keeps prices down via market competition.
"You’ll see the money sometimes sits idle in bank reserves without causing immediate inflation"
Bank reserves are assets of banks that sit in Central bank accounts. You or I can't hold them because we can't have central bank accounts. They can only ever be passed to other banks.
Your view of banking is completely wrong. Try this explanation from the Bank of England. https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
It doesn't stay in the drawer though. The total supply is a constraint on all actors as they compete for resource allocation. By increasing the supply and relaxing the constraint, some participants can out compete (raise the price) of scarce resources. This is only possible to go to the levels in all areas simultaneously due to the increased supply. No increased supply to match the increased wealth from treade, you get deflation, which is desirable for savers.
It has to stay in the drawer or it would disappear as the flow passed tax and repayment points.
If you can see it, it is in a drawer, and therefore not inflationary.
Plus anything you replace it with has the same problem. There is no magic power in interest rates to keep it in the drawer.
There isn't a one-to-one relationship between money and stuff. It's more of an inductive relationship that is more like the power triangle. There is 'reactive money' as there is 'reactive power'.
If you can see it, it is in a drawer, and therefore not inflationary.
Plus anything you replace it with has the same problem. There is no magic power in interest rates to keep it in the drawer.
There isn't a one-to-one relationship between money and stuff. It's more of an inductive relationship that is more like the power triangle. There is 'reactive money' as there is 'reactive power'.
Your monetary theory is that nobody spends any of the money that is created as a result of increasing the money supply? OK Paul Krugman, I'll see myself out.
Bitcoin doesn't have the same problem. Monero doesn't have the same problem. The magic power of interest rates is to hide the theft of inflation by artificially increasing dollar demand from debt holders of the currency. With a hard currency, people tend to take less debt, and less risk with debt. Fortunately they also have less need to borrow because the currency appreciates in value.
Bitcoin doesn't have the same problem. Monero doesn't have the same problem. The magic power of interest rates is to hide the theft of inflation by artificially increasing dollar demand from debt holders of the currency. With a hard currency, people tend to take less debt, and less risk with debt. Fortunately they also have less need to borrow because the currency appreciates in value.
Now that would be a straw man wouldn't it.
If you have any money in your wallet or your bank account at any point in time you are not spending the money that is created as a result of the dynamic ebb and flow of the quantity of money in the system.
The sum total of those people not instantly spending money when they get it is a deficit. It's just the accounting counterparty of people waiting before they spend their money.
But then we're back to the famous Dijkstra quote
"… our intellectual powers are rather gathered to master static relations and that our powers to visualize processes evolving in time are relatively poorly developed. For that reason we should do (as wise programmers aware of our limitations) our utmost best to shorten the conceptual gap between the static program and the dynamic process, to make the correspondence between the program (spread out in text space) and the process (spread out in time) as trivial as possible"
The riff on that would be called "sound money beliefs considered harmful"
If you have any money in your wallet or your bank account at any point in time you are not spending the money that is created as a result of the dynamic ebb and flow of the quantity of money in the system.
The sum total of those people not instantly spending money when they get it is a deficit. It's just the accounting counterparty of people waiting before they spend their money.
But then we're back to the famous Dijkstra quote
"… our intellectual powers are rather gathered to master static relations and that our powers to visualize processes evolving in time are relatively poorly developed. For that reason we should do (as wise programmers aware of our limitations) our utmost best to shorten the conceptual gap between the static program and the dynamic process, to make the correspondence between the program (spread out in text space) and the process (spread out in time) as trivial as possible"
The riff on that would be called "sound money beliefs considered harmful"
Take a look at a graph of the US monetary supply [1]. Many factors can contribute to inflation, but monetary supply is generally the dominant driver. And since February 2020, the US monetary supply has increased by about 40%. You can also see a table of inflation levels here [2]. The causes today being blamed for the inflation happened long after the inflation. It's just gas lighting, pun intended.
[1] - https://fred.stlouisfed.org/series/WM2NS
[2] - https://www.multpl.com/inflation/table/by-month
[1] - https://fred.stlouisfed.org/series/WM2NS
[2] - https://www.multpl.com/inflation/table/by-month
Look at this graph: https://fred.stlouisfed.org/series/WM2NS
See the discontinuity? That's not an artifact of changes to how money supply is measured. It's a real, unprecedented increase in the money supply.
If not inflation, what impact would such an increase have? Is increasing money supply the world's first free lunch? If so, why not accelerate it's growth even more?
See the discontinuity? That's not an artifact of changes to how money supply is measured. It's a real, unprecedented increase in the money supply.
If not inflation, what impact would such an increase have? Is increasing money supply the world's first free lunch? If so, why not accelerate it's growth even more?
I agree, it is childish thing to tell the truth, when lying and obfuscating is more conducive to gain and preserve power.
Another comment in the same thread is a link to a Bridgewater associate saying the same thing. It's economic orthodoxy. Either you can believe that every reputable mainstream economist is wrong or admit politicians have a vested interest in not admitting fault.
What is the adult view?
Probably that it’s more complicated than that.
Is it really? If we agree that there was a huge increase in money supply and that supply of goods stayed the same or decreased then it follows logically that more money would be needed to acquire same quantity of goods. Seems fairly simple!
Children would tell it like it is, or rather like you just have. Adults would pretend it is much more complicated and cannot possibly be their fault.
The Emperors have no clothes.
> those aren't the reasons for the inflation. The increase in the money supply is.
Why was the money supply increased?
Why was the money supply increased?
Because it was an easy lazy way to keep getting out of tight bends like 2008 and Covid, only not enough effort was put to reverse it.
E.g. paying for it with taxes or raising the miney with bonds.
https://www.bridgewater.com/its-mostly-a-demand-shock-not-a-...
I've always found this insightful.
I've always found this insightful.
From Oct 2021, when the bureaucrats in charge were claiming inflation was transitory...
So where would inflation be if there was no war in Ukraine and a massive energy crisis Several months later?
Do you think the sudden loss of energy, which affects our ability to produce everything, has had a negligible effect on inflation?
Do you think the sudden loss of energy, which affects our ability to produce everything, has had a negligible effect on inflation?
It has had a measurable effect on inflation. However it is not the most significant impact on it. You can look at the rates of inflation before the war started and see how high they were.
If you want to adjust for reality, then find the actual rate of increase for rent and home ownership during the time frame. The US data lags considerably.
If you want to adjust for reality, then find the actual rate of increase for rent and home ownership during the time frame. The US data lags considerably.
Dodging the question though. How much of an effect? Because I’m inclined to guess upwards of 3 points. Because high energy costs affect everything. And if that’s true… not really much of a story.
I wasn't trying to dodge the question, I was figuring that you could actually look up the inflation rate in February of 2022 in compare it to April 2022 for yourself.
It's not clear to me that either China will have abandoned lockdowns nor that the Ukraine war will be over in a year. Like, maybe they will! But it seems plausible that they won't.
I agree that neither are likely to last a decade or anything. But I'm not sure what anything we're doing right now is predicated on the idea that they will last a decade.
I agree that neither are likely to last a decade or anything. But I'm not sure what anything we're doing right now is predicated on the idea that they will last a decade.
Supply chain effects don't seem to have a fundamental reason not to get resolved. What about the Ukraine war? What's the endgame and resolution on the horizon?
And another 2008 like Fed opening the dam too early and closing it too late.
Anecdotally, I suspect today's inflation is caused by a couple factors.
2 & 1 Regulatory changes to make it easier to build within approved project profiles would really help. The US should adopt Japan's style of area zoning and require that nation-wide (though States and more local areas should still decide which areas are zoned what). As would changes that make ALL types of energy production easier to finance and build in PRE-approved configurations. Electric trains, trucks, and cars would really help with insane energy prices caused by unfriendly global oil interests.
1 Housing hasn't kept up with job growth locations of the US, and probably internationally as well, for at least 50 years. This needs market _correction_ level directives and instead of rent-protection skyscraper, middle-sized multi-levels, townhouses, and even some single family sized houses, where they make sense, need to be built.
1 Not enough Housing (where people want and NEED it)
2 Global politics exacerbating energy shortages
3 Insufficient supply (generally) for demand
2 & 1 Regulatory changes to make it easier to build within approved project profiles would really help. The US should adopt Japan's style of area zoning and require that nation-wide (though States and more local areas should still decide which areas are zoned what). As would changes that make ALL types of energy production easier to finance and build in PRE-approved configurations. Electric trains, trucks, and cars would really help with insane energy prices caused by unfriendly global oil interests.
1 Housing hasn't kept up with job growth locations of the US, and probably internationally as well, for at least 50 years. This needs market _correction_ level directives and instead of rent-protection skyscraper, middle-sized multi-levels, townhouses, and even some single family sized houses, where they make sense, need to be built.
> Not enough Housing (where people want and NEED it)
Not a new problem. Wouldn't have caused a spike.
> Global politics exacerbating energy shortages
Energy prices have contributed a little to US inflation, but it's not the main factor. Inflation was also an issue in 2021 before the Ukraine war, but it's a fair point as it hasn't helped in 2022.
> Insufficient supply (generally) for demand
This is an issue, but in recessions it's not uncommon for supply to drop. What's uncommon is for demand not to fall inline (or more than) supply, but instead skyrocket.
Call me crazy, but I have a simpler explanation for the spike in inflation we saw in 2021: https://fred.stlouisfed.org/series/WALCL
The Fed has been funding extremely reckless fiscal policy for two years. We literally shut the economy down and gave people checks for doing nothing. I don't think we need to reach for fancy explanations. The reason for inflation seems plainly obvious to me.
Not a new problem. Wouldn't have caused a spike.
> Global politics exacerbating energy shortages
Energy prices have contributed a little to US inflation, but it's not the main factor. Inflation was also an issue in 2021 before the Ukraine war, but it's a fair point as it hasn't helped in 2022.
> Insufficient supply (generally) for demand
This is an issue, but in recessions it's not uncommon for supply to drop. What's uncommon is for demand not to fall inline (or more than) supply, but instead skyrocket.
Call me crazy, but I have a simpler explanation for the spike in inflation we saw in 2021: https://fred.stlouisfed.org/series/WALCL
The Fed has been funding extremely reckless fiscal policy for two years. We literally shut the economy down and gave people checks for doing nothing. I don't think we need to reach for fancy explanations. The reason for inflation seems plainly obvious to me.
> Call me crazy, but I have a simpler explanation for the spike in inflation we saw in 2021
> The Fed has been funding extremely reckless fiscal policy for two years. We literally shut the economy down and gave people checks for doing nothing. I don't think we need to reach for fancy explanations. The reason for inflation seems plainly obvious to me.
You're not crazy, just willfully narrow-minded. How does your theory explain the inflation seen all around the world, including in countries with vastly different Covid policies? Take Sweden, no lockdowns at all, but the economy still slowed down due to people making different choices. However there were no mass layoffs and no "checks for doing nothing". Still, inflation is at 10%.
The pandemic (distributions to the economies and global supply lines) and a war disrupting critical raw materials (foodstuffs and energy) have contributed to the inflation, a lot. Nobody can say how much exactly, but blaming any single factor is willful narrow-mindedness.
> The Fed has been funding extremely reckless fiscal policy for two years. We literally shut the economy down and gave people checks for doing nothing. I don't think we need to reach for fancy explanations. The reason for inflation seems plainly obvious to me.
You're not crazy, just willfully narrow-minded. How does your theory explain the inflation seen all around the world, including in countries with vastly different Covid policies? Take Sweden, no lockdowns at all, but the economy still slowed down due to people making different choices. However there were no mass layoffs and no "checks for doing nothing". Still, inflation is at 10%.
The pandemic (distributions to the economies and global supply lines) and a war disrupting critical raw materials (foodstuffs and energy) have contributed to the inflation, a lot. Nobody can say how much exactly, but blaming any single factor is willful narrow-mindedness.
> You're not crazy, just willfully narrow-minded. How does your theory explain the inflation seen all around the world, including in countries with vastly different Covid policies? Take Sweden, no lockdowns at all, but the economy still slowed down due to people making different choices. However there were no mass layoffs and no "checks for doing nothing". Still, inflation is at 10%.
Energy and the USD, mainly. In Europe inflation is high primarily because of energy costs. Local currencies are also down 10-20% vs the USD and Europe imports a lot of stuff in dollars. That said, I'm not sure about the exact breakdown of inflation in Sweden specifically so I can only comment generally.
I also add that domestic stimulus measures in the US (both monetary and fiscal) have a significant global impact today. If demand for oil or other commodities rise in the US then they do in markets around the world too. Excessively reckless monetary and fiscal stimulus in the US combined with today's reckless tightening is causing havoc in developing markets around the world.
Energy and the USD, mainly. In Europe inflation is high primarily because of energy costs. Local currencies are also down 10-20% vs the USD and Europe imports a lot of stuff in dollars. That said, I'm not sure about the exact breakdown of inflation in Sweden specifically so I can only comment generally.
I also add that domestic stimulus measures in the US (both monetary and fiscal) have a significant global impact today. If demand for oil or other commodities rise in the US then they do in markets around the world too. Excessively reckless monetary and fiscal stimulus in the US combined with today's reckless tightening is causing havoc in developing markets around the world.
It would be nice if Jerome Powell and the other Fed Governors owned up to it. They were printing dollars via QE and adding reserves into the banking system as recently as March of this year. Last year, they were adding $120 billion/month of QE into the banking system. They have just ramped up to removing $90 billion/month. They're not removing monetary accomodation at the same rate it was injected.
No resignations for making such a massive sequence of errors.
No resignations for making such a massive sequence of errors.
The government was also injecting trillions of dollars in stimulus. This isn’t entirely the Fed’s fault.
I feel similar, from everything I've read, historically creating money causes inflation. We created money and we got inflation. What am I missing?
Creating money causes inflation if it ends up in the hands of people ready to spend it. But if you printed money endlessly and gave it all to Jeff Bezos, there would be no competitive pressure to see prices rise in the general economy. He might try to buy up all the real estate or stocks, driving asset inflation, but there is little reason for him to buy up all the bread to see it appear in CPI where we measure general inflation.
And by all accounts the people don't have any more money. In fact, governments around the world have been creating support packages to deal with the people not having more money to support the rising prices. This suggests that it is supply-side driven, and I'm going to suggest food in particular.
The farm price for food started rising at the beginning of the pandemic when labour was difficult to secure amid illness. Then came the big fertilizer crunch which remains ongoing. Then the war in Ukraine, Europe's bread basket. And now there are looming fears over diesel availability. A quadruple whammy in short succession for something that everyone has to buy.
Saving rates are crashing to support this temporary blip, but with very little income growth it doesn't look sustainable. You can't have inflation if people don't have money to spend. As we start to solve some of our food issues, fertilizer in particular, a massive deflationary event seems quite likely.
And by all accounts the people don't have any more money. In fact, governments around the world have been creating support packages to deal with the people not having more money to support the rising prices. This suggests that it is supply-side driven, and I'm going to suggest food in particular.
The farm price for food started rising at the beginning of the pandemic when labour was difficult to secure amid illness. Then came the big fertilizer crunch which remains ongoing. Then the war in Ukraine, Europe's bread basket. And now there are looming fears over diesel availability. A quadruple whammy in short succession for something that everyone has to buy.
Saving rates are crashing to support this temporary blip, but with very little income growth it doesn't look sustainable. You can't have inflation if people don't have money to spend. As we start to solve some of our food issues, fertilizer in particular, a massive deflationary event seems quite likely.
> But if you printed money endlessly and gave it all to Jeff Bezos, there would be no competitive pressure to see prices rise in the general economy. He might try to buy up all the real estate or stocks, driving asset inflation, but there is little reason for him to buy up all the bread to see it appear in CPI where we measure general inflation.
The connection isn't all that obvious, but there is indeed a connection between fresh money being invested in financial asset XY and price for bread rising. Even though the investor did not buy up piles of bread, they created pressure on some scarce resources in the value chain on the way to bread. Those are energy, base materials, labour force, ...
Whenever an institution (central bank, commercial bank, ..) creates fresh money and this money gets invested in something, a portion of total global resource allocation (towards different end products) gets shifted. Shifted means that some end products see an increase of costs in their value chain, which leads to higher prices.
Example: commercial banks in some country xy are allowed to lend more due to some changes in the rules for fractional reserve banking. The banks currently have some kind of skew in their allocation of lending, meaning they don't just lend exactly proportional to current total allocation of credit. Let's say they lend more (in respect to current allocation) to real estate development businesses than to bakeries. This means that the real estate sector now has more bidding power for all the scarce resources (energy, raw materials, ...) than the bread sector. So there's new demand for energy from the real estate sector which makes energy prices rise. Voilà, bakeries spend more on energy, bread prices rise as well.
And all that without "someone buying up all the bread".
Injecting fresh money in the financial sector will lead to real world resource reallocation, which will put pressure on sectors that don't even seem to be involved.
The connection isn't all that obvious, but there is indeed a connection between fresh money being invested in financial asset XY and price for bread rising. Even though the investor did not buy up piles of bread, they created pressure on some scarce resources in the value chain on the way to bread. Those are energy, base materials, labour force, ...
Whenever an institution (central bank, commercial bank, ..) creates fresh money and this money gets invested in something, a portion of total global resource allocation (towards different end products) gets shifted. Shifted means that some end products see an increase of costs in their value chain, which leads to higher prices.
Example: commercial banks in some country xy are allowed to lend more due to some changes in the rules for fractional reserve banking. The banks currently have some kind of skew in their allocation of lending, meaning they don't just lend exactly proportional to current total allocation of credit. Let's say they lend more (in respect to current allocation) to real estate development businesses than to bakeries. This means that the real estate sector now has more bidding power for all the scarce resources (energy, raw materials, ...) than the bread sector. So there's new demand for energy from the real estate sector which makes energy prices rise. Voilà, bakeries spend more on energy, bread prices rise as well.
And all that without "someone buying up all the bread".
Injecting fresh money in the financial sector will lead to real world resource reallocation, which will put pressure on sectors that don't even seem to be involved.
> Shifted means that some end products see an increase of costs in their value chain, which leads to higher prices.
In the long run, but it is not uncommon to see production lose money when their input costs are higher than the consumer price. A vendor is still beholden to what someone will pay and when you have to pay for your inputs before proving what the end consumer will pay, you can quickly be left holding the bag. This corrects eventually, but not usually within the span of days or even months. It can often take years to see things correct.
You still can't have inflation if the people don't have money. A business can't magically charge more than someone is willing and able to pay. And they say the people don't have more money to pay with, currently subsisting on draining their savings, so inflation will be short lived – unless incomes start to rise. The FED is working tirelessly to try and prevent that from happening, but we'll see.
In the long run, but it is not uncommon to see production lose money when their input costs are higher than the consumer price. A vendor is still beholden to what someone will pay and when you have to pay for your inputs before proving what the end consumer will pay, you can quickly be left holding the bag. This corrects eventually, but not usually within the span of days or even months. It can often take years to see things correct.
You still can't have inflation if the people don't have money. A business can't magically charge more than someone is willing and able to pay. And they say the people don't have more money to pay with, currently subsisting on draining their savings, so inflation will be short lived – unless incomes start to rise. The FED is working tirelessly to try and prevent that from happening, but we'll see.
> ... you can quickly be left holding the bag. This corrects eventually, but not usually within the span of days or even months. It can often take years to see things correct.
You're aware that especially bakeries have been raising prices very promptly all over the world.
True, price raises do have delays in some cases (rents) but generally for most common services and products that people buy in everyday life, if there's no cartel messing with prices, they will very consistently and without years of delays increase when inputs become more expensive.
> You still can't have inflation if the people don't have money.
This might be true for the more dispensible items in the basket but I'd say for real necessities it's mostly wrong. People who have little money will first shift their expenses from less necessary things to essentials. Even if people don't have more money, they will have to spend more on the things they continue buying. This is exactly what's happening right now, almost everywhere.
> A business can't magically charge more than someone is willing and able to pay.
Unless there are subsidies by the state that try to keep the businesses afloat. These are very pervasive.
You're aware that especially bakeries have been raising prices very promptly all over the world.
True, price raises do have delays in some cases (rents) but generally for most common services and products that people buy in everyday life, if there's no cartel messing with prices, they will very consistently and without years of delays increase when inputs become more expensive.
> You still can't have inflation if the people don't have money.
This might be true for the more dispensible items in the basket but I'd say for real necessities it's mostly wrong. People who have little money will first shift their expenses from less necessary things to essentials. Even if people don't have more money, they will have to spend more on the things they continue buying. This is exactly what's happening right now, almost everywhere.
> A business can't magically charge more than someone is willing and able to pay.
Unless there are subsidies by the state that try to keep the businesses afloat. These are very pervasive.
As someone who deals with hardware down to the single component level supply chain issues are definitely still a thing. So you will find random products that see themselves without that one IC needed to manufacture it. I myself had to re-design a whole PCB because a (during normal times standard) part was not available even in the timiest quantity anywhere.
And because of the efficiency fetishism we have managed ourselves into the chip shortage still ripples back and forth (people stockpiling parts themselves will lead to local shortages etc).
So there certainly is an element of "you cannot get the thing you want to get, even if you have money"
And because of the efficiency fetishism we have managed ourselves into the chip shortage still ripples back and forth (people stockpiling parts themselves will lead to local shortages etc).
So there certainly is an element of "you cannot get the thing you want to get, even if you have money"
> The Fed has been funding extremely reckless fiscal policy for two years. We literally shut the economy down and gave people checks for doing nothing. I don't think we need to reach for fancy explanations. The reason for inflation seems plainly obvious to me.
100% this. I don't understand the motivation or the logic of the people who argue against something that's so obvious
100% this. I don't understand the motivation or the logic of the people who argue against something that's so obvious
Because its not universal. Lotsa European countries have decades-high lvl of inflation without having printed money.
maybe not during covid, but the eu bank did follow the same kind of very generous monetary policies and super low interest rates for the decade prior, as the fed.
Okay. So why did inflation show up globally all at once rather than when these policies were in place?
i believe all government played the same game ( at least us, eu and china did), which is probably enough to impact the whole world.
A few currrency which didn't play that game such as swiss franc saw their value raised tremendously, which probably means inflation is much less an issue there.
A few currrency which didn't play that game such as swiss franc saw their value raised tremendously, which probably means inflation is much less an issue there.
oh yeah absolutely. but we didnt get to try the whole direct-transfert that happened in the US during the covid crisis. Depending on the country, there were "technical unemployement" measures that have been applied. Basically companies reduce your working hours temporarly, and thus your salary, and your unemployment insurance fills the gap.
Your theory doesn't account for the fact that most economies worldwide are seeing high inflation (besides China and Japan).
Central bank policies have been coordinated for a decade. Its a new phenomena.
Think of it like this, the Weimar Republic is a textbook example of hyperinflation because we could compare its currency to neighboring currencies. Now we couldn't do that exact kind of comparison if we wanted to because the neighboring currencies are being created at a proportional rate to the size of their relative economies.
(We have to look at prices of a basket of consumptive goods instead.)
Think of it like this, the Weimar Republic is a textbook example of hyperinflation because we could compare its currency to neighboring currencies. Now we couldn't do that exact kind of comparison if we wanted to because the neighboring currencies are being created at a proportional rate to the size of their relative economies.
(We have to look at prices of a basket of consumptive goods instead.)
In most countries their Fed equivalent printed money like crazy. I know in European countries that was the case.
> 3 Insufficient supply (generally) for demand
Welcom to Always Late Inventory(tm).
Nobody has any inventory to absorb demand. Nobody has any excess capacity to bring online to absorb demand. Nobody is going to tool up for demand that is likely to go away once fulfilled--especially since most of them have no competitors anyway due to consolidation. Rattle this backward at each step of the supply chain.
Maximally efficient is minimally robust.
Welcom to Always Late Inventory(tm).
Nobody has any inventory to absorb demand. Nobody has any excess capacity to bring online to absorb demand. Nobody is going to tool up for demand that is likely to go away once fulfilled--especially since most of them have no competitors anyway due to consolidation. Rattle this backward at each step of the supply chain.
Maximally efficient is minimally robust.
> especially since most of them have no competitors anyway due to consolidation.
This is the core explanation for the observed price increases being of the same magnitude as increases in corporate profits.
This is the core explanation for the observed price increases being of the same magnitude as increases in corporate profits.
You left out the underlying factor, which was Covid stimulus including the grants and loans that were written off. Money was being created and then funneled to the sectors of the economy which were not productive (such as commercial real estate) creating stress in the sectors that were. This will inevitably cause inflation with the conditions 2 & 3 you listed.
Housing is due for a correction as prices are at such high multiples of average wage. The wage price growth we see now is just the first step in bringing the ratio down.
Housing is due for a correction as prices are at such high multiples of average wage. The wage price growth we see now is just the first step in bringing the ratio down.
Ignored, not forgot. It'd be like 4 or 5 on the list at least, and was a 'One Time' (spread across 3 or so events within about a year) tax holiday like effect. The timing was, maybe not the best, but I've yet to see a compelling explanation for how it would have an overall effect on __long term__ inflation.
I'm not just talking about government spending, but central bank intervention as well. It's in the trillions -
https://www.bloomberg.com/graphics/2021-coronavirus-global-d...
https://www.bloomberg.com/graphics/2021-coronavirus-global-d...
For some reason people keep skipping over this part...
1 - makes no sense. We had the same (worse, really) housing shortages pre-COVID with very little inflation.
1. I suspect that the 1% who owns 98% of the wealth parks their money into things like land and real-estate, which is causing an artificial shortage and price hikes.
There's a deficit of 600,000 residential units.
Isn't it fascinating how everyone likes to theorize but no one is consistently right about the causation of macroeconomic developments? Understanding a distributed system with 7.8 billion agents is... hard.
I think it is the labor market. Pandemic caused a lot of people to leave the labor market.
But we’re at full employment…
Labor force participation rate is lower than pre pandemic.
https://www.bls.gov/charts/employment-situation/civilian-lab...
I assume it resumes overall downward trend simply due to aging population.
https://www.bls.gov/charts/employment-situation/civilian-lab...
I assume it resumes overall downward trend simply due to aging population.
The people who “drop out” of the labor market (not working and don’t collect unemployment) basically are not counted. They are not considered part of the labor force. I know people who get burned out and live off their savings for long periods of time.
Interestingly, even though the labor participation rate hasn't returned to pre-covid levels, total civilian labor force levels have: https://fred.stlouisfed.org/series/CLF16OV#0
Full employment of a smaller labor force, you need to look at the labor force participation rate [0] to get the whole picture.
Yes unemployment is at near record lows, but the percent of the population in the work force is the lower than its been since the 1970s.
0. https://fred.stlouisfed.org/series/CIVPART
Yes unemployment is at near record lows, but the percent of the population in the work force is the lower than its been since the 1970s.
0. https://fred.stlouisfed.org/series/CIVPART
> Full employment of a smaller labor force,
the civilian labor force is higher than ever. as of Sept 2022, 153M non-farm workers [1], 130M private employees [2].
[1] https://fred.stlouisfed.org/series/PAYEMS
[2] https://fred.stlouisfed.org/series/USPRIV
the civilian labor force is higher than ever. as of Sept 2022, 153M non-farm workers [1], 130M private employees [2].
[1] https://fred.stlouisfed.org/series/PAYEMS
[2] https://fred.stlouisfed.org/series/USPRIV
I feel like I shouldn't have to explain the idea of participation rate but what you've posted is the numerator, you need to divide it by total working age population to get the rate.
you said "Full employment of a smaller labor force". its not a smaller labor force. its a larger labor force as the number of employees is at an all-time high.
Not sure what to make it of it, but statistics suggest that our per unit output of labour has dropped substantially. So, good employment rate or not, we’re producing less with our labour either way.
This is the case in the United States and Canada, at least. Not sure about the rest of the world.
This is the case in the United States and Canada, at least. Not sure about the rest of the world.
Naively, you would expect a bit of a drop in productivity when going to full employment, as the least productive workers are generally hired last.
Total production, notably, is still increasing.
Total production, notably, is still increasing.
Which is a statement that doesn't gainsay what you commented on in any way. People leaving the labor market is not measured by the unemployment rate, it is measured by the labor participation rate.
Two things would improve Labor...
4 An immigration policy that allows new (eager to work for less) citizens a legal path to work within the country, and maybe even become full citizens in the future.
1 More housing so workers can afford to live near where the jobs are.
4 An immigration policy that allows new (eager to work for less) citizens a legal path to work within the country, and maybe even become full citizens in the future.
1 More housing so workers can afford to live near where the jobs are.
In theory interest rates should be set at a level which keeps demand in balance with supply, but isn't so high that they're out of line with economic fundamentals.
For example, imagine I were to say, "the US economy is so strong today consumers can afford 7% mortgage rates". This is obviously laughable. The underlying economy isn't strong enough to support anything even close to those kinds of rates, but because of excessive fiscal and monetary stimulus over the last couple of years the consumer has high savings, low debts and extremely low 30-year fixed rate mortgages - the Fed could raise rates to 50% and for a large percentage of US consumers today it would make practically no difference.
Similarly with the US being a consumer economy so long as the consumer is strong businesses are generally going to be fine. Some overleveraged companies might go under, but those with healthy balance sheets will likely do better than ever, keeping the labour market robust.
The problem we have today is that rates are now way too high relative to underlying economic strength, yet are doing close nothing to address the supply / demand imbalances we're seeing. In fact they're at levels so high it wouldn't just slow demand but kill it dead were anyone actually forced borrow at them.
And yes, eventually some people will have unexpected expenses which they'll need to put on credit cards, and from time to time people will need move and be forced to try to afford a mortgage at a much higher rate, but that's going to take quite some time given robust levels of savings and otherwise historically low mortgage servicing costs. https://fred.stlouisfed.org/series/MDSP
I guess what I'm saying is that the Fed has no effective tools to address this. The US consumer is almost completely insensitive to interest rates moves right now. What I'd argue we actually need is fiscal measures such as tax increases and spending cuts to force down economic demand.
Should rates keep rising though (which is likely given the Fed never seems to have any idea what they're doing) then eventually someone's risk model will blow up because these are unprecedented moves we're seeing in the treasury and FX market today. Expect people in developing countries to starve and expect a series of financial crises in developed economies. Of course I hope that doesn't happen and I hope eventually the Fed sees sense, but this does seem to be the path we're on today.
For example, imagine I were to say, "the US economy is so strong today consumers can afford 7% mortgage rates". This is obviously laughable. The underlying economy isn't strong enough to support anything even close to those kinds of rates, but because of excessive fiscal and monetary stimulus over the last couple of years the consumer has high savings, low debts and extremely low 30-year fixed rate mortgages - the Fed could raise rates to 50% and for a large percentage of US consumers today it would make practically no difference.
Similarly with the US being a consumer economy so long as the consumer is strong businesses are generally going to be fine. Some overleveraged companies might go under, but those with healthy balance sheets will likely do better than ever, keeping the labour market robust.
The problem we have today is that rates are now way too high relative to underlying economic strength, yet are doing close nothing to address the supply / demand imbalances we're seeing. In fact they're at levels so high it wouldn't just slow demand but kill it dead were anyone actually forced borrow at them.
And yes, eventually some people will have unexpected expenses which they'll need to put on credit cards, and from time to time people will need move and be forced to try to afford a mortgage at a much higher rate, but that's going to take quite some time given robust levels of savings and otherwise historically low mortgage servicing costs. https://fred.stlouisfed.org/series/MDSP
I guess what I'm saying is that the Fed has no effective tools to address this. The US consumer is almost completely insensitive to interest rates moves right now. What I'd argue we actually need is fiscal measures such as tax increases and spending cuts to force down economic demand.
Should rates keep rising though (which is likely given the Fed never seems to have any idea what they're doing) then eventually someone's risk model will blow up because these are unprecedented moves we're seeing in the treasury and FX market today. Expect people in developing countries to starve and expect a series of financial crises in developed economies. Of course I hope that doesn't happen and I hope eventually the Fed sees sense, but this does seem to be the path we're on today.
Indeed. The Fed only controls monetary policy, it can't control fiscal policy, and specifically can't remove money from those which have far too much spare (HNWIs and corporations) through the tax system.
Morgan Stanley lending Musk $12bn to destroy twitter with is the sort of thing that only happens when there's too much loose money at the top.
Morgan Stanley lending Musk $12bn to destroy twitter with is the sort of thing that only happens when there's too much loose money at the top.
This is an incredibly insightful comment.
(By the way, I read your post about insomnia troubles. I used to struggle quite a bit. Tried everything. So many medications. What ultimately helped me was cognitive behavioral therapy. Almost all insomnia is a consequence of overthinking about sleep. This Harvard professor wrote a whole book about it. Highly recommend. What else do you got to lose? The book is called "Say Goodnight to Insomnia" by Gregg Jacobs.)
(By the way, I read your post about insomnia troubles. I used to struggle quite a bit. Tried everything. So many medications. What ultimately helped me was cognitive behavioral therapy. Almost all insomnia is a consequence of overthinking about sleep. This Harvard professor wrote a whole book about it. Highly recommend. What else do you got to lose? The book is called "Say Goodnight to Insomnia" by Gregg Jacobs.)
I largely agree. I think the Fed doesn’t have the lever to make the needed change. But if they raise rates enough to really hurt the economy then of course it’ll affect whatever is actually causing prices to rise. But at too large a cost.
No mention of quantitative easing. Am I missing something?
If the answer was simply "they printed too much money out of thin air" then we wouldn't need experts to tell us what else it could have been.
It’s not simply printing money but maintaining high demand when supply wasn’t there
Sure thing, man. Prices are going to fall right back to 2020 levels any year now.
I don't think your point hits how you think, if prices -could- fall to the 2020 level then you could say it was mostly supply/demand driven and not monetarily driven. Of course, it never will, which lends to the idea that this has a major monetary cause on top of everything else.
I'm a cynic and the majority of the time when I hear something like "experts to tell us" all I think of is clout chasers pontificating to anyone who'll lend them an ear.
Quantitative easing did not drive inflation in any relevant way. If it did, the society wide inflation would have showed up a lot earlier.
This is just not true, QE caused massive inflation in asset classes. People just didn't complain about that because it made them feel richer, but it widened the gap between rich and poor. People that have investments are much more worried about a Fed policy mistake by being too tight, but rarely if ever complain about it being too loose. I'm sure some MMTers wish we were still at 1.5% in complete denial that monetary policy matters a LOT to inflation, in fact usually being the main driver...which every monetary theorist basically agrees on.
> The simplest reason I believe we won’t have a repeat of the 1970s inflationary spiral is because Fed officials have studied that period and the mistakes made by their predecessors.
There are no mistakes to be made because the Fed is a talking organization only. It stopped trying to regulate money decades ago. Bank reserves are the only thing it can control, and they have very little effect on the real economy. The Fed raises and lowers interest rates, begins and ends QE, to exactly the opposite effect of what's purported and nobody comments on it.
Here's the real reason this isn't the 1970s: the bond market is telling all of us so. The bond market is telling us that inflation is about to fall and fall hard. The yield curve is inverted all the way up to the 3 month. Inversion has been the norm for months now. Inflation will roll over and the Fed will have had nothing to do with it.
There are no mistakes to be made because the Fed is a talking organization only. It stopped trying to regulate money decades ago. Bank reserves are the only thing it can control, and they have very little effect on the real economy. The Fed raises and lowers interest rates, begins and ends QE, to exactly the opposite effect of what's purported and nobody comments on it.
Here's the real reason this isn't the 1970s: the bond market is telling all of us so. The bond market is telling us that inflation is about to fall and fall hard. The yield curve is inverted all the way up to the 3 month. Inversion has been the norm for months now. Inflation will roll over and the Fed will have had nothing to do with it.
america can afford a terrible Fed. But Europe and the ECB will have to follow the same path and that will be disastrous for europe
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So, if the Fed has made a terrible mistake and the theory is disproven , will it have to be abolished / change mandate?
The only we'll ever this inflation period flattened is to reduce marketing to a strict minimum to keep demand down.
Of course not. This is 2022, not 1973.
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The biggest problem with have with inflation right now is that it's being persisted by the upper middle class and above, ie. the white collar workers. Meanwhile the lower-income people are the ones that are truly suffering but they have no control over it. The massive amount of income inequality we have seen since Obama in 2009 is causing this to happen.
The white collar workers are persisting inflation because they can afford to keep paying whatever it costs to get whatever they need. They can get wage increases commensurate with inflation. Meanwhile, the lower income, ie. The Poors, have no control and just have to endure and suffer with inflation.
The only way we cut inflation is by having mass layoffs of white collar workers. We won't see a recession at all until white collar workers stop spending. Until we see that, we're going to get very sticky 5%+ inflation, and then once layoffs start happening, then a recession will be quick and sharp.
This will be an extremely hard landing for all of us.
The white collar workers are persisting inflation because they can afford to keep paying whatever it costs to get whatever they need. They can get wage increases commensurate with inflation. Meanwhile, the lower income, ie. The Poors, have no control and just have to endure and suffer with inflation.
The only way we cut inflation is by having mass layoffs of white collar workers. We won't see a recession at all until white collar workers stop spending. Until we see that, we're going to get very sticky 5%+ inflation, and then once layoffs start happening, then a recession will be quick and sharp.
This will be an extremely hard landing for all of us.
That pandemic saw a huge reversion in trends towards wage earners away from corporate power due to labor changes from millions of people dying or leaving the workforce due to illness.
In the current era, policy makers seem to be making a characteristic silence on labor force shifts. (And immigration is seeing pushes to diminish supply of labor.)
Also the current era sees historically high levels of market power concentration at the corporate level. Simply, if market power is ceded to an entity then changes in that market are likely caused by those power brokers and they’ll be the ones with the power to make whatever change - all else staying the same.
If I’m wrong then Powell increasing rates will have the desired effects with minimal side effects. Side effects being a sign that “the lever pulled did work but only through secondary effects managing to affect the right underlying factors.” This would signify that interest rates weren’t the best way to address inflation.
If I’m right, then market concentration needs to be directly addressed through regulation and oversight. Empower the workers - the people.