If inflation is looked at as nothing more than an expansion of credit, and deflation is looked at as a contraction of credit; then believe you me when people start to loose faith in the dollar…… credit will be contracted to spurn people being aware of the reality of having to earn more dollars instead of borrowing more dollars. This will be from actually working but also people divesting of investments to cover their debt on the inevitable deflationary cycle.
Putting on my conspiracy theory glasses……..I see a Fed that wants 2% inflation on paper, the real reason being that they always see deflation as an existential threat to the banking system. That’s their motivation.
But……the Congress needs a bit more than that…..to cover their profligate spending and (especially) their unfunded liabilities looming in the years just ahead. More like 5%. Five percent inflation tax makes the math work.
So if you can get 5% inflation……and you can effectively fake the numbers to make them look like 2%, then the sheeple keep schlepping off to work to fulfill their mission of providing a dependable weekly payroll deduction….and ever paddling a little harder to keep their head above water.
Even if they can’t figure out why they go through more boxes of Cheerios than they used to…….and why paper towels cost $20 a pop.
TheWindowCleaner
2 years ago
Neo-liberal economist’s models are flawed alright, but so are libertarian’s models. They ‘re both afflicted by the same thing that Ptolemaic cosmologists were perplexed about before helio-centrism was found to be the actual reality. In other words all of their calculations were inaccurate because they operated within the current paradigm…instead of recognizing and confronting the new one.
Economists and economic pundits on both/all sides have to be willing to drop their orthodoxies, be willing to integrate certain of their beliefs with those of their critics and be willing to embrace the third-ness aspect of the dialectic. That’s because conceptual opposition is the hallmark of imminent paradigm change and the willingness to integrate is the hallmark of accomplished paradigm changes.
To resolve economics’ major problems change the current monopolistic monetary and financial paradigm of Debt Only to Debt and Strategically Direct and Reciprocal Monetary Gifting at the point of retail sale. That would enable both greater individual and commercial monetary abundance while simultaneously implementing the impossible so far as orthodox theory is concerned, that is beneficial price and asset deflation.
Carl_R
2 years ago
I don’t have time to read in full this excellent article, but I disagree that pricing expectations are irrelevant, at least, I disagree that they are always irrelevant, and that for everyone they are irrelevant. As someone who sets prices, my inflation expectations do matter, sometimes, in certain circumstances. As the article mention, in normal circumstances, businesses set prices in response to pricing pressures, yet that is not always true. This year was a good example. I expected:
1. Wage pressure caused by the commotion over a $15 minimum wage
2. Price increases due to supply disruptions
3. Consumers to be more tolerant of price increases than usual
As a result of my expectations, I did a larger than usual price increase. So far all three expectations have been correct, so I’m glad I did. If I continue to expect more of the same, I will do another increase in January. I’d rather be ahead than behind when costs are making big jumps.
Yet, none of the above explains why the Fed surveys households. IF they had a way to survey people who set prices, they might get a number that is useful, at least in times where things are changing quickly. Surveying consumers can never be useful, however, for all the reasons Mish mentions.
RonJ
2 years ago
“Powell places great faith in the inflation expectations models but
conveniently ignores an actual New York Fed ongoing study of
expectations.”
Maybe his job depends on him ignoring it. Greenspan was a gold bug before he became Head FED and after he was no longer Head FED, but not during time as Head FED.
When asked why the FED was still holding gold, Bernanke replied, “tradition.”
Tony Bennett
2 years ago
Low inflation “counting” allows Monetary Policy to run amok (vastly enriching The Haves) … while making COLA adjustments to Entitlements negligible.
Good point. If inflation gets up over, say, 5% a month, people definitely factor it in and try to spend their money faster. Thus, in some situations, consumer expectations could matter.
Scooot
2 years ago
Good article Mish, I enjoyed reading that. I believe The Fed and the other Central Banks pursue an inflation target to devalue Government debt over time. They think they can manage 2% without it getting out of hand and the general public noticing.
dbannist
2 years ago
Even a stopped watch is right 2x a day. I agree that the FED has been badly wrong on consumer expectations. They are, of course, fatally flawed in their analysis. A good quote for them is “When your livelihood depends on a man not understanding something he will not understand it”.
However, they may prove to be right by accident and inflation expectations may rise. If they do I expect much crowing by the FED about it and it will provide proof for their own group think that they were correct all along.
ed_retired_actuary
2 years ago
Mish,
You make some strong points, but are also to some extent knocking down a straw-man. Proponents of inflation expectations argue that it operates primarily through labor markets rather than the consumer goods and services markets on which you focus.
It may also be that for a long period of time in which inflation has been relatively stable, inflation expectations have not been statistically significant as a predictor of inflation. During recent years the inflationary impact of increased money supply has largely been offset by decreased monetary velocity. However, as monetary expansion is pushed beyond prior limits, psychology can change toward treating cash as a hot potato not only in investment markets (as has been the case in recent years, aka TINA) to consumer markets, leading to an uptick in monetary velocity and the inflation that follows.
“Proponents of inflation expectations argue that it operates primarily through labor markets rather than the consumer goods and services markets on which you focus.”
…
Hooey.
People’s expectations are rooted in what they see … ie: gas pumps. Re labor market August real earning down 0.9% year over year.
Mish is dead on correct pointing out obvious errors in weighting components … and then we can discuss the farce of hedonics + black box magic.
He is saying that if people expect more inflation, they will demand bigger raises, which in turn will lead to more inflation. That may happen to some extent, but there is no empirical evidence supporting the proposition that consumer expectations affect future inflation.
There is no demanding of bigger raises (outside of some specialized sectors … even those can be threatened by H-1B) or risk further offshoring / automation. The masses have been placated (so far) by access to easy credit. Looking at the mountain of debt that model about finished.
If people expected inflation of 20% a year, they would be demanding bigger raises. If inflation is in the 2-5% range, inflation is an annoyance, but isn’t going to jump into the middle of every wage discussion. Given the current situation, I think we agree that it isn’t a factor at the moment, but it is not impossible for it to become a factor.
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conveniently ignores an actual New York Fed ongoing study of
expectations.”
However, they may prove to be right by accident and inflation expectations may rise. If they do I expect much crowing by the FED about it and it will provide proof for their own group think that they were correct all along.