Interesting, but just seems the Fed and other key actors are in a damned-if-you-do-damned-if-you-don't phase and there's no way out. The Fed being afraid to do whats necessary (and the fact that Wall St. will cry and have a meltdown if the apple cart is flipped) doesn't help.
The fact that wage growth has stagnated for like 30 years (at least in the US) and markets became used to outsized profits doesn't help either.
This inflation issue is entirely a making of our own shortsightedness.
>and the fact that Wall St. will cry and have a meltdown if the apple cart is flipped
Does Wall St include people directly invested in equity and debt markets via 401k/IRA/defined benefit (DB) pensions/etc and indirectly via being taxpayers of jurisdictions that have taken on those DB pension liabilities?
Or anyone buying a home, or working for a company that uses debt to bridge cash flow, or anyone who uses infrastructure like roads.
What I’m curious about is what component of inflation is the fact even with shipping rates dropped a ton they’re still twice what they were pre pandemic and fuel costs, which drives a marginal cost of any physical good, being so high? Maybe it’s a war disrupting energy prices and food?
Inflation is caused when demand is higher than supply can meet. Given the worlds ability to produce JIT it feels implausible that supply can’t meet demand if inflation were just left alone. I don’t know that making everyone poorer to reduce demand is the right answer. Maybe just let inflation happen for a while and keep capital cheap so we can invest rapidly in expanding supply?
> Given the worlds ability to produce JIT it feels implausible that supply can’t meet demand if inflation were just left alone.
Just as you can not deliver a baby in one month with 9 pregnant women, you can not grow food faster than it takes.
Also, there is no "leaving alone". As a central bank, you have to choose an interest rate, and this affects bond yields, stock prices, and financing costs (such as to produce said food).
You can grow more food with more money as long as we have land to grow food on. As food becomes more expensive more food will be grown. If it gets expensive enough vertical farms and other capital intensive growing capacity would be viable (as long as capital is cheap). Your analogy is false because you’re measuring latency and calling it bandwidth. If I want more babies in a shorter amount of time then absolutely 9 pregnant women wins over trying to make one woman pregnant 9 times. With food we want more food and plants grow in parallel. It’s not about the first grain of rice, it’s about the trillionth.
Leaving alone in what I said means “don’t mess with the cost of capital and let people borrow to expand supply as fast as we can.” Eventually as we grow capacity to produce and people compete for higher prices we will overshoot supply, a consolidation will occur, and prices will drop. Trying to decrease supply expansion by making it more expensive to borrow to fund expansion will not improve supply. It will indirectly reduce demand by inducing savings and inducing a decrease in economic activity and a recession and unemployment, and therefore suffering.
A couple of things:
Your assumption of limitless JIT production is wrong but it's better to address this second.
Your statement about making everyone poorer to reduce demand is confusing. Do you mean raising interest rates makes everyone poorer and we shouldn't do it? If so, that's not true. It makes people that have borrowed poorer and it makes people who have lent richer. There are second order effects where borrowers can no longer borrow and spend so demand is reduced but that's not really making people poorer, it's limiting their ability to spend money they don't have. If you meant inflation was making everyone poorer, that's true, but your statement doesn't come off that way. Raising prices broadly makes everyone poorer, which is why the central bank should be fighting inflation with whatever tools they have.
Back to the limitless JIT production. if that was true (and we had limitless delivery to where goods were needed) then yah, we wouldn't have inflation, I agree. What we have instead is high production capabilities that took a hit from the war and a much larger hit from Covid policies messing up factory production and all this being fed into a severely overloaded transport system with chokepoints at most ports causing backlogs. if you want the high JIT production and delivery to be true then you need to address the causes of it not being true and that is often (but not always) government. Government is standing in the way of breaking the unions and automating the ports, for example. Government is also standing in the way of new fossil fuel infrastructure that is desperately needed via extreme uncertainty in regulatory approval processes.
Note, on government interference it’s hard to not point out the fed is a quasi governmental institution acting to contract the economy and induce a recession to deal with COVID and gas prices and wars and stuff. Doesn’t that play into your argument that these things are all made worse by governmental intervention?
Raising interest rates discourages capital investment which makes it harder to expand. It also makes businesses that float on warehouse credit less able to operate. Raising the cost of borrowing hurts anyone spending while rewarding those saving. since economic growth happens through increased spending, you can only shrink economic activity by encouraging saving. This makes everyone poorer because there’s simply less money available. Only those with excess capital to save benefit, but they really don’t benefit in an economic sense but in a notional sense.
If the issue is supply can’t meet demand, you can either reduce spending or demand and increase savings or you can make capital expansion cheaper and encourage supply meeting demand. The former makes everyone poorer because the economy shrinks. The latter grows the economy, and makes everyone richer.
Now I agree inflation is bad for everyone. But inducing a global recession is an ass backwards way to solve it. Expanding supply capacity and ability to deliver while reducing frictional cost of transportation solves it in a positive way.
But either way won’t see results over night. It takes time for any of this to happen. But I’ll argue here that inducing a recession and economic downturn by rewarding saving and not spending leaves us at a worse place in 10 years than we would have been had we grown into the demand and rewarded capital expansion in the face of increasing demand.
Note, I know there’s a morality in our culture around spending and saving as a concept, but I think these are entirely specious. You should save regardless of the reward structure to provide stability and a buffer against turbulence, and being parsimonious is IMO the actual moral imperative. Saving and spending in the above isn’t necessarily at an individual level but at a societal level. Saving is necessarily contracting economic activity by making capital expensive and removing currency from exchange for goods and services, and creating artificial incentives to save will lead to misery - layoffs, shrinking economic activity, declines in equity markets and the value of real goods relative to savings, etc, all of which is not beneficial to anyone in the long run.
Inflation, unless followed on with expansion of currency to try to battle inflation, will resolve itself naturally either way. But letting supply and demand work out the price in the market and making capital cheap means more people and businesses will try to capture more of that extra demand. That’s good isn’t it? Usually markets overshoot so you would ultimately see a period of deflation, especially if a recession pops out, undoing the experienced inflation.
But creating a recession to make people spend less and therefore decrease expansion and opportunity for growth is a truly awful strategy.
You have a bunch errors in there.
First paragraph:
1. Raising interest rates does not discourage capital investment equally. It raises the expected future value needed by an investment to justify going forward, so it discourages marginal/malinvestment. The all in podcast had a decent chart on why this is a good idea recently that showed investments when the market is this overheated losing pretty uniformly.
2. You confuse money with stuff. Generally, more stuff makes people richer, not more money. More money when there isn't enough stuff makes inflation.
3. More spending is currently how we measure growth but it's dangerous and incorrect to label growth coming from spending. Savings drives capital accumulation and capital drives efficiency gains/production gains, which means more ability to produce more stuff. It is easy to make this error because there are tons of things we can do that destroys the capital stock but drives spending in the near term to great medium/long term detriment.
second paragraph:
4. This whole thing is basically wrong. Making credit cheaper only "solves" the problem if the credit expansion can grow the output of whatever the constraint(s) is(are) faster than it is growing demand for the constraint itself. This is both not gauranteed and not likely in this case given we were already basically at the zero bound interest rate and funding all sorts of insane startup ideas/company largess at the large companies. Higher interest rates reign in malinvestment, which is definitely happening right now and destroying demand from malinvestment is a very good thing.
Third paragraph:
5. Do you think the economy wasn't trying to self correct in the way you describe and failing prior to interest rates being tightened? We had very extended and worsening inflation from the exact strategy you describe before the central bank finally flipped to tightening. If this actually worked we wouldn't be here.
Fourth paragraph:
6. This is impossible to agree on because I would say the places that have taken this path to its logical conclusion ended in hyperinflation and economic death spiral and you will say those places weren't really trying what you propose.
Fifth paragraph onward:
7. I obviously strongly disagree with you for non moral reasons so I don't see a lot of value addressing your morality arguments.
Any definition of inflation that ignores everything but supply and demand is too simple. Include velocity of money, interest rates, the fed’s dual mandate and you get close to a useful understanding. Any discussion about inflation that ignores those elements probably just adds to the general public’s woeful ignorance. Inflation is the feds’ job, if you have high inflation, the fed failed. Fluctuating supply and demand should have minimal impact on inflation, unless the fed screws up by, for example, trying to overshoot “full employment” when all the inflation alarm bells are already ringing. Arguably that is what happened, and there’s a general consensus about this in circles that actually have a clue, current and former fed members.
Monetary policy definitely impacts prices. However high prices induces expansion if capital is available. This lowers prices. The rest you outline are fingers you can place on the scales in either direction. But in the end if supply is elastic and demand increases prices might go up for a while but as supply capacity builds prices will drop as competition increases. Monetary policy doesn’t change that equation, it just gives you a lever to induce spending or savings.
Leaving inflation alone disproportionally affects the people who don't have a lot to begin with. 10% inflation is much more palatable when that's your coffee budget than when it's your rent.
You’re right. But the feds moves will lead to less spending and increased savings, which will result in economic contraction and the loss of employment. A 10% drop in purchasing power is painful, 100% is catastrophic.
We've been trying that and it hasn't worked. If you remember the "transitory" arguments from last year, that's what those were about. The people saying inflation was "transitory", who won the argument at the time, meant that they agreed with your diagnosis and wanted to just let it happen for a while.
> Given the worlds ability to produce JIT it feels implausible that supply can’t meet demand if inflation were just left alone.
I mostly agree. We see a clear supply problem right now. China's covid lockdowns mean any new iPhone Pro ordered today will not be here until next year.
If there’s a lot of money to capture I will expand by businesses to capture it if capital is cheap. This causes competition, which causes prices to drop as demand has more options to purchase.
There is just a while by the way. Increasing interest rates is a very indirect way to manage inflation. You essentially stimulate savings and increase the cost of growth by making capital more expensive and makes services that depend on warehouse credit more expensive to operate. Stimulating savings decreases spending which decreases economic activity which decreases demand and makes supply exceed demand and prices drop. But it also means less economic activity, which translates into unemployment, lack of wage growth, and other factors. But this process takes time, just like supply expansion through cheap capital (low interest rates). It’s also really hard to reverse a recession while it’s easy to stop a boom.
I’d rather stuff become more expensive for a while and keep my job and get raises to account for it while the economy expands to meet demand than lose my job and have absolutely nothing and struggle to make ends meet while we stumble through a recession, especially since inflation will keep going for some time despite the recession.
The petit bourgeois are indeed included in the investor class in this hypothetical. Bailouts of defined-benefit pension plans would probably only be necessary if the high-interest regime continues for many years. The fact is that real wages have declined substantially YoY [1] for the working class due to price increases and this is a typical impact of a high-inflation environment. Protecting homeowners by bleeding the people who still have adult roommates is morally decrepit.
> Bailouts of defined-benefit pension plans would probably only be necessary if the high-interest regime continues for many years.
In my perspective, the bailout has been happening for decades, every time the federal government steps in to prevent broad market prices from substantially declining.
Not only have politicians been keeping labor costs low by using high ROI assumptions, they have been underfunding DB pension plans even with those rosy assumptions providing low costs for budgeting purposes.
For this reason, I think it is safe to assume the government will backstop equity prices over the long term (5+ years). It would not be politically popular amongst the voting population to let them fall.
Lol yeah. The apple cart has already flipped. The "rich" are seeing their balance sheet completely melt down right now, and may even get worse still.
People get what they want, and it's still not good. In this case, triumph of labor, high wage growth, low employment, and rentiers scurrying to eek out any kind of gain.
I understand the Fed can only raise rates and stop buying things. Rates are going up and they're reducing their balance sheets. I'd like them to stop backing mortgages completely but I don't think that's what they want to do anyway.
Raising rates to an appropriate level, keeping them there and firmly resisting Wall St's pressures to lower them.
Somehow, people have been conditioned to believe that low interest rates == economic growth and that high, or reasonable interest rates (say, 5-10%) means a recession.....which is absurd if you think about it.
The cost of a bank loan or mortgage isn't, nor shouldn't be, the bellwether for effectively measuring the state or health of a given country's economy.
If a business has a need for an employee, that business will still have that need regardless if rates are 0.1%, 5%, 10% or 50%. Businesses of all sizes will just need to front more of their own money to grow, rather than using the bank's money to grow.
Broadly speaking we the people cheered for and demanded cheap money.
Baby steps towards raising rates (during massive boom years) were decried by the markets, by politicians (an particular an ex-President) and by the populace generally who are not well informed on what central banks do. The central banks should have raised rates anyways - but let’s not pretend like everyone wouldn’t have hated them for causing a recession or even just a slow down in growth by doing so.
> let’s not pretend like everyone wouldn’t have hated them
The whole point of the nominal independence of the Fed from the political process is that they would be able to take unpopular decisions that may hurt in the short term but will further their dual mandate (maximum employment and price stability) in the medium and long term.
Seeing as they cannot do that, and these days are venturing further away from their mandate by assuming the mantle of fighting climate change as well as racial inequity, we might as well do away with it entirely. It's not like the financial history of this country hasn't been replete with one crisis after another even after the advent of the Fed, and one dollar at the time of the creation of the Fed is worth about $30 now, so prices have only been stable for a strange definition of price stability. (For comparison, the Swiss franc inflated about 10x in a similar time period.)
>Broadly speaking we the people cheered for and demanded cheap money.
Exactly! We saw what cheap money did to rebound the economy after the 2008 crash - it created the largest bull run we've ever seen.
Politicians, hoping to keep their jobs (and make sure their trading accounts grew), said "yeah, we'll keep things right as they are" because they didn't want to be the ones that caused a cool down which would in turn cost them their jobs (and insider information).
OK so putting the sarcasm aside can anyone with a bit of know how on monetary policy actually explain why all the media keeps pointing at Covid and fertilizers and Ukranian war rather than the QE since 2008?
Is this central banks diverting attention or is the parent comment overly simplifying this?
Your hunch is correct. The constant cry of “money printing!!!!” Is an oversimplification.
It’s not totally wrong mind you, but as we all know, prices are set by supply and demand.
An obvious example that I think a lot of people can easily connect with is the fact that globalization has been deflationary (it’s driven prices down), and that isn’t a monetary phenomenon.
As someone sympathetic to MMT, the solution in my opinion has less to do with the fed, Congress needs to tighten fiscal policy.
Acknowledging one of these is much more politically palatable to the elites than the other. If the economy suffers a bit, well that's just because we cut off a world-leading supplier of fuels, food, and industrially-important metals, not because we've been fucking over the rest of you for own profit over and over and over again. Reality is, both are true to greater and lesser extents depending on who and where you are. Economy is complex, the global geopolitical situation is undergoing a major shift, probably nothing will be clear without 100 years of hindsight.
I find anything that blames some "elite" and implies a direct or indirect relationship between such an "elite" and the media extremely hard to believe. It seems unlikely to me that some conspiracy of journalists and CEO's came together to shape the entire political system.
It’s not a conspiracy if it’s business as usual. The people in charge just hire folks that share their views, fire those that go off message, and provide editorial guidance to those who are receptive. It’s not even a criticism specific to media. Most large organizations work this way to some degree.
This sounds incredibly cynical to me. It seems desirable to me that a newspaper has some authorial cohesion. That the audience of readers has some identifying viewpoint and person that they can comprehend. So editorial guidance in that sense seems positive.
I guess I can imagine how such a editorial process could create a monoculture (although I don't think it has to), but that's where multiple newspapers become useful. While one newspaper may have some editorial angle, different newspapers have different editorial staff.
Journalists also seem to me to be rather principled people. If their editors were systematically suppressing certain stories and angles, I'd expect them to start a new newspaper, especially considering how easy it is to get started nowadays, and report on that.
With all these considerations I don't see what system would keep these stories back. Editorial staff can maybe control a single newspaper, but they can't control the other media. Even if they could, they wouldn't be able to control journalists that may become disillusioned by such a system.
Where do journalists get their information? What social class do politicians and business owners belong to? What social class do university-educated literati aspire to and identify with? I don't know why you imagine a conspiracy of any kind is necessary.
I'm sorry, but this reads like some Qanon "drop". Why are you throwing implications at me instead of just providing the argument you've clearly already formed?
I don't believe that a conspiracy is required per se, but i don't see what other argument you could be trying to make. I can tell from your rhetorical questions that you're implying some power dynamic and allegiance between politicians and CEOs, but I don't see how that explains the peoples own propensity for voting for those same politicians.
If democracy does nothing else, it at the very least implicates the people in their own apparent suffering. You can't really decry the "elites" if you vote for them.
Would we have had a recession without Covid or the War? It seems pretty unlikely from what we know. Covid wrecked supply chains and the War wrecked energy + food prices. So the Fed has to step in to try and clamp on demand rather than letting the world economy grow organically to meet it.
I have a feeling that the answer is yes - because economics is kind of cyclical. We can't have a boom without the inevitable bust, so to speak.
Plus, keeping interest rates unrealistically low for over a decade just to please the highest echelons of financial power (under the bullshit guise that lower interest rates == more jobs) does nothing more than pause the natural economic cycle and, honestly, it just makes the bust that much more inevitable and dangerous.
Most people in monetary policy circles (and virtually everyone with a role in setting monetary policy) think of the money supply as a parameter that can be adjusted pretty freely rather than a fixed resource you need to be careful with. To them, pointing to the money supply as a cause of inflation is like pointing to the water supply as a cause of why your house is flooded. It's not false, but it doesn't mean that you should eliminate your flood risk by tearing the pipes out of your walls and satisfying all your water needs with buckets from the local well.
Unfortunately there's a political element to it (because the Fed is not actually independent in the truest sense - they have to walk political tightropes just like every other official in Washington) and that's where things get messy.
The problem is - how do you improve this system while taking into consideration the real-world effects of Fed policy?
As a rule "all the media" never has any idea what they are talking about. It is easy to verify that on the subjects that you know. It doesn't go away on the other ones.
I have never seen central banks trying to divert attention. That something that politicians do, and central banks communications tend to be done by technical people (not by their heads).
I have seen plenty of head of governments trying to divert attention from some economical fact, but the lack of understanding of fundamental things, like cause and effect, monetary identities, and the difference between monetary and real indicators are always there and don't seem to be planted by any PR team.
Well, 2008 was 14 years ago. If QE was "the cause" then why did it take so long to have its effect? Whatever the reason, why isn't that thing "the cause"?
It's a bit like an unhealthy person dying from a heart attack. What's the cause of death: the heart attack or decades of unhealthy habits? And if the later, which habits and how should the person have changed? Even then, something is missing if the explanation omits the heart attack itself.
Loans. Having the central banks print cash is a great way to steal money. You just take on huge amounts of debt, pump trillions of generated cash into the system. Then the suckers (old people, working class) have their saved dollars devalued without any ability to earn interest. The corporations,rich, etc, then just watch as their debt value decreases over time [tomorrows dollars are worth less and less, and so is your debt]. The corps keep charging higher and higher prices - sucking up those sweet sweet future value dollars, while only owing yesterdays cash.
The real problem with this recession is that businesses are being asked to reduce prices by increasing supply - but paradoxically, the cost of increasing supply is higher because of interest rates.
Just reducing demand with a recession doesn't reduce the price of goods automatically. For CPI to go down, someone on the supply side has to accept lower prices. Who is going to accept it? Only the most desperate of producers, and only if the owners of businesses want to continue that business. Paradoxically, if owners don't want a low margin business, they'll just shut them down causing even more shortage.
One solution appears to be a deep recession that wipes everyone out and then another low interest rate cycle to start the business cycle again. But this will be very very painful and unpopular.
Another solution appears to be for governments to incentivize increase in production. But this can't be a monetary incentive since that will cause even more inflation.
A third solution is to export inflation to developing countries. Just import a lot more from other countries at lower prices so that CPI remains low. But without Chinese manufacturing, where is this going to go?
The more amusing, although not completely unpredictable result of this based purely on human nature, is that all this excitement will likely increase demand in short term as people panic stock up on items before inflation increases prices out of their reach. You can apparently still see it in cars ( SUVs anecdotally for whatever reason ).
We are in for a wild ride. One issue with economics is that it is based on a flawed model ( rationality is assumed ) and humans are way more emotional than the model allows for. I would like to hope that some marketing company has a real and closer model for predictions, but that is likely a closely guarded corporate secret.
> The real problem with this recession is that businesses are being asked to reduce prices by increasing supply - but paradoxically, the cost of increasing supply is higher because of interest rates.
You've nailed why the fed is in a pickle. Their only tool is a hammer, when they need a screwdriver. People moaning about energy companies not investing in more supply are missing that the fed is on the other side telling those same companies they are going to reduce demand and drive prices down. It doesn't make sense to invest in more supply when the fed is actively working against you.
> Everyone can agree on one thing about the past year. It has revealed quite how little economists understand inflation, including both what causes it and what causes it to persist. ...
The larger problem is the lack of a common definition of the word "inflation". This article is an example. There are 27 instances of the word and no definition.
The definitions used by most experts seem to fall into one of two categories:
1. a general increase in prices, as measured by the US Consumer Price Index or similar metric
2. a monetary phenomenon
But these are not by themselves definitions, either. The CPI is split into core, non-core, and a dizzying variety of other metrics. When people talk about "monetary" inflation, the landscape is equally fragmented. The various money metrics have been discredited by some, flat out rejected by others, and revered with near religious fervor by others.
If there's this much lack of consensus about what inflation is exactly, there can be little hope of predicting its future course, let alone controlling it.
I love how we still read about predictions from few people on such a complex thing. How often economist or experts were be able to predict future accurately? not often.
I think inaccuracy is necessary for entertainment value. Ancient people for example made much around trying to predict astronomical phenomenon, before we were able to do that precisely. What is depressing about economics is that we don't really seem to be making progress towards accurate predictions like we have done with physical sciences.
The most valuable insights usually come from economists treating their discipline as history and not like some hard science with models that fail to capture the nuances of our reality.
What’s the alternative? People enjoy reading predictions because it helps inform their opinion on a topic. An opinion on a topic as important as inflation is quite consequential. People use such opinions to decide whether or not to buy a house, change jobs, etc. If we stop reading the opinion of others, how can we build our own opinion on a topic?
They started fighting it rather late, though, and some of the underlying reasons are different. In the 70's the labor force was expanding due to baby boomers and women entering the workforce.
So these are conclusions borne of accepting without question neoliberal foundations.
The false premise here is that central bank action (Ie interest rates) is the only way to tackle inflation. This is false. Interest rates are indiscriminate. Whether you own a mortgage or are a failing business or a successful business, you are impacted to varying degrees.
Increasing interest rates is a form of wealth redistribution to banks.
The alternative to interest rates is taxation. Just enact an 80% corporate income tax rate and redistribute that wealth to the taxpayers most adversely affected by that.
A lot of people like to demonize, for example, oil companies for "price gouging" when the price of oil is set by a global commodities market. If an oil company charged less, someone else would simply profit the difference between the charged price and the market price as a form of arbitrage. The history of price controls as effective long term strategy is not good. Others will also argue oil companies are engaging in price manipulation. That's a longer conversation with some (but honestly not a lot) of merit. But it actually doesn't matter.
Why? Because the solution is to both of these problems is simply taxation.
Opponents might argue that corporations will simply pass that cost on. Won't that simply generate more profits which generate more taxation?
There is a fundamentally adversarial relationship between capital and labor here, which is why neoliberal publications like the Economist talk about depressing wages being a necessity. This is what's lead to almost no aggregate real wage growth in 40 years.
Wealth redistribution to taxpayers essentially hedges the inflation problem but that borders on socialism, which is why it's not part of any serious conversation about inflation.
Why is economic recession equated with reducing inflation?
In the 90s Turkey had 100% YoY inflation despite a growing economy. After the fall of the Soviet Union many of the former Soviet republics had soaring inflation amidst crippling economic depression.
There are multiple possible underlying causes and people are usually talking about one of them.
Inflation is usually associated with too much demand (people attempting to buy more), and when that happens the economy is usually pretty good. A recession can happen when the central bank tries hard to fight it.
In other cases it's caused by a collapse in supply, which can happen when things are going badly.
Please don't gaslight. The entire premise of this Economist writing is that inducing recession by jacking up interest rates isn't the inflation cure-all The Great And The Good are group-thinking it is.
Sure, a major recession would typically but not always be expected to reduce inflation. That's far from "equating" as I understand the definition of the word. It's surprising but not reality-defying that this one might not, which is why this article is interesting, rather than boring or impossible.
The fact that wage growth has stagnated for like 30 years (at least in the US) and markets became used to outsized profits doesn't help either.
This inflation issue is entirely a making of our own shortsightedness.