Powell Disses Inflation and Ignores Questions From Congress About Leverage

Mish

Today was day two of Congressional testimony by Fed Chair Jerome Powell. It was another day of market-soothing talk.

Tight Lipped Powell

In day two of Congressional testimony, Powell was Tight-Lipped on Bank Dividends and Leverage. 

  • Federal Reserve Chairman Jerome Powell deflected lawmakers’ questions on two items that are at the top of Wall Street’s wish list: whether the Fed will drop restrictions on bank dividends and if it will keep giving lenders a break on capital demands due to Covid-19.
  • In back-to-back hearings in the Senate yesterday and House today, Powell refused to budge in the face of repeated queries -- mostly from Republicans -- about temporary measures the Fed implemented to strengthen the financial system during the pandemic.
  • Powell offered similar versions of the same quote, “That’s something that’s under consideration right now.” Basically saying: You’ll know the answer when we tell everybody else.

What About Jobs?

What About Overheating and Inflation? 

Yesterday and today, Powell Pushed Back on Concerns of Prices Rising, Overheating.

“Our policy is accommodative because unemployment is high and the labor market is far from maximum employment,” he told the House Financial Services Committee on Wednesday, in his second day of testimony to Congress. “It’s true that some asset prices are elevated by some measures.”

Powell pointed to the example of car prices rising because of a chip shortage and supply-chain constraints in the tech industry.

“That doesn’t necessarily lead to inflation because inflation is a process that repeats itself year over year over year,” he said, rather than a one-time surge.

In multiple questions from lawmakers about the risk of the economy overheating -- with additional government aid and continued support from the central bank -- the Fed chair reiterated his view that there’s a long way still to go before returning to pre-pandemic strength.

During the hearing, Powell voiced confidence that the Fed would succeed in lifting inflation and getting it to average 2% over time.

“I’m confident that we can and that we will, and we are committed to using our tools to achieving that,” he said. “We live in a time where there is significant disinflationary pressures around the world and where essentially all major advanced economy’s central banks have struggled to get to 2%. We believe we can do it, we believe we will do it.”

Powell said that “it may take more than three years” to reach that goal but vowed to update the Fed’s assessment on the issue every quarter. ​

Market Soothing Talk

If the Fed had a clue, it would recognize economic bubbles as a sigh of inflation.

If you expected Powell would be different than all the group-think Chairs who preceded him, you thought wrong.

Yesterday, I noted The Fed Soothes the Market Today With More Easy Money Talk

Powell repeated the same message today and the DOW closed at another all-time high.

How Long Can This Go On?

Note the Very Unusual Move in Mortgage Rates vs the 10-Year US Treasury Yield in which mortgage rates ought to be 75 to 100 basis points higher than they are.

The Fed via QE asset purchases is doing a far better job manipulating mortgage yields lower than it has done controlling yields on long-term treasuries.

My question on February 14 still stands: How Long Before the Fed Tries to Manipulate Long-Term Rates Lower?

Mish

Comments (55)
No. 1-10
Roger_Ramjet
Roger_Ramjet

And still, after all of these years of hearings, not one politician is willing to ask the most basic and fundamental question: why is 2% inflation a good thing? Please let us all know. Whoever asks that question and demands a straight answer will be a patriot and a hero, in my eyes.

47 Replies

Eddie_T
Eddie_T

If you had all the money in the world...and you were a bank and you lent me the whole wad....and I paid it back on time in payments with interest, where would the money come from to pay the interest, without increasing the money supply over time?

So debt based money, by definition, requires inflation to avoid collapse.

Could we all agree on that? Is that a reasonable assumption? If not, why not?

If we can agree on that much, it just becomes an argument about how much is enough and how much is too much, and how much is too little.

The US government borrowed a lot of money to pay for WWI.....and in 1917 the inflation rate nearly hit 20%....that seemed to be too high....it caused a lot of problems. Wage earners went bankrupt and pensioners couldn’t buy food. Stuff like that.

In 1932, during the worst of the Great Depression, the inflation rate was a negative 10%.....10 percent DEFLATION and that seemed to be too low....it caused a lot of problems. Runs on the banks. Massive destruction of value.

So empirically one might come to the conclusion that the inflation rate should be less than 20% and greater than -10%.

In general people complain more when the nominal value of their hard won assets is FALLING and less when they’re rising....so you could make the argument from that that....that maybe inflation should be at least higher than zero.

So...what I really think is that we’ve seen when inflation gets close to zero that people fear (and therefore perhaps do things unwittingly to cause) deflationary events...by hoarding and paying down debt.

And we know from experience that if inflation is steadily rising it has a way of also getting out of control, as people make poor decisions about how to allocate capital....speculation on risk assets goes hog wild.

So how about a nice little tame amount of inflation that doesn’t scare anybody......or make them inclined to bet the farm on the future price of chinchilla furs or tulips or......bitcoin?

2% sounds good. If you miss the target at least maybe you stay in positive territory. If you overshoot it a little, well 3% is not terrible.

It would be great...except what we can see, I think, is that not all asset prices move in lockstep. You can have less than 2% CPI...and 11% inflation in housing in Austin Texas.....at the very same time.

outwest20
outwest20

Q: "...where would the money come from to pay the interest, without increasing the money supply over time?"

A: Velocity. (The same money can be lent out and paid back over and over again. The total created does not necessarily ever have to equal the total amount that changes hands over time.)

Also, when the Fed says 2% "inflation" they do not mean a 2% increase in the money supply, which appears to be part of what you are describing. The Fed means a 2% or greater reduction in the purchasing power of money year after year, as measured by their specific method, including hedonic adjustments. In other words, they will take 50% of every person's purchasing power in 35 years or less and PLUS every dime of improvement in standard of living that would have occurred due to better productivity and quality.

Their policy is an inflation tax levied upon savers to prevent the big over-leveraged debtors from collapsing, plain and simple. The biggest over-leveraged debtor benefiting from this is the US Government. In the long run, this policy is going to severely harm US economic growth and dynamism. No country ever successfully borrowed their way to prosperity in the long term. The Fed tells people this is short-term policy, but since there is no credible exit plan, I have to conclude that it will be with us for the long term.

Felix_Mish
Felix_Mish

Q: "...where would the money come from to pay the interest, without increasing the money supply over time?"

Would it be possible to print some money and not have price inflation?

@Eddie_T , you sure raise an interesting aspect of "What-the-hell-is-money?". Food for thought. Thanks.

Mish
Mish

Editor

The only ideal inflation is to not sponsor any at all.
2% is patently absurd

TexasTim65
TexasTim65

@Eddie_T - An increase in the money supply in and of itself is not inflation. Even when we were on a gold standard the money supply was increasing constantly due to mining gold/silver.

Inflation occurs when too much money chases too few goods/services. If the economy consists of 1 billion in goods and 1 billion in dollars then each good costs $1. If the goods and money supply both double to 2 billion there is no inflation because each good still costs 1 dollar. So as long as the economy grows at the same rate as the money supply everything is fine. Right now (well for a long time) the Fed is expanding the money supply (and credit) wildly compared to how sluggish the economy is growing so inflation is really heating up (in some sectors more than others).

Note that even on a gold standard there were times of inflation. Spain in the 15 and 16 hundreds had this happen when they were looting gold/silver from the new world and vastly increasing their money supply but were hardly adding any new goods/services to their economy so all their gold/silver was buying far less than it did before.

Quanta
Quanta

You need some inflation to account for population growth. That's it.

Quanta
Quanta

The answer of why you ABSOLUTELY NEED inflation in theory is simple. Inflation actively encourages investment instead of hoarding the money. The devaluation of money going forward provides a more level field for the younger population and also small inflation is needed to account for population growth. Otherwise the cash just sits there and is not being re-invested into new things. Make no mistake, a small amount of inflation is GOOD. It has to "small" though, and I don't know what that number is.

What's bad is that actual current inflation is running much much higher and is being mis-reported intentionally to benefit the mega-rich, megabanks etc who are the first in line for giant federal money hand outs. Mish has covered extensively why CPI reported is a joke. Not only does CPI exclude essential items, but is also affected by hedonics - a shamanistic practice of valuation of goods that can in theory tweak your inflation as much as you like in any direction.

Doug78
Doug78

Very good analysis of the utility of moderate inflation Eddie.

JonSellers
JonSellers

"Would it be possible to print some money and not have price inflation?"

As in all things: it depends. Suppose I own a factory that produces very popular widgets. Everybody wants at least one. I've settled on the idea that I should charge $10 for each one, because that figure maximizes my profit while simultaneously doesn't lead to people thinking the prices is too high and spending their money elsewhere (demand destruction). And, my factory isn't running at full capacity. Meaning I could easily double production if the demand was there.

Now the government steps in and starts printing money, and putting it in the pockets of regular folks who really want one of my widgets. What do I do? Raise prices or produce more? Well, I don't want to raise prices because once raised, they're hard to lower (people get pissed when they find they could have gotten a lower price). So instead, I hire a few more employees and increase production.

Moral of the story? Printing money may lead to increased production if, and only if, you have excess capacity in areas that have high demand.

Eddie_T
Eddie_T

It was just a hypothetical meant to create discussion. :) :)

Eddie_T
Eddie_T

Thanks for the thoughtful insights. I agree about the tax part...absolutely.

Eddie_T
Eddie_T

Thank you for the cogent reply.

Eddie_T
Eddie_T

Thanks. Good points.

Realist
Realist

Mish: “The only ideal inflation is to not sponsor any at all.
2% is patently absurd”

I think I understand what you are trying to say. There should be no fed interference, and preferably no fed at all. There should be no deliberate “sponsoring” of inflation. The free market should determine what the inflation rate is, because the free market is self-correcting.

However, we do need a “medium of exchange” to facilitate trade and our modern economy, as we rarely exchange cabbages for cows.

What should this medium of exchange be? How would it work? How would you prevent someone from interfering with it or manipulating it? Would it be okay if inflation became 100% per year when using this medium? Or -50% deflation?

Would a cryptocurrency be suitable if it could meet all your requirements for a medium of exchange? Or is gold the only possibility for you?

Scooot
Scooot

“Inflation actively encourages investment instead of hoarding the money.”

Doesn’t a real return/real rate of interest do that? Whereas a negative real return does the opposite, which is what we have now in many places?

Scooot
Scooot

Well, why is 2% the right number, why not 1.5 or 2.5 or 1.9 etc? 2% is a number that’s plucked out of thin air. Zero (if achievable) is the right number in my opinion because everyone would know where they stood. If it were zero on average it would be a good indication that money itself wasn’t being debased.

Realist
Realist

When did I ever say that 2% what the right number? Like so many commenters here, you are trying to put words in my mouth.

You are assuming that because I posted the Mark Carney answer, that it was my answer. I posted that after searching for an answer to Roger Ramjet, who wanted to know why central bankers want 2%. I found Carney's answer and posted it for him. It's that simple.

This is happening a lot lately. People keep trying to put words in my mouth. I'm getting tired of it.

Quanta
Quanta

I believe the nominal interest rate follows the investment landscape. If investment opportunities are poor, the nominal interest rates are poor. Then to compute the real interest rate, we substract inflation. A small amount of inflation discourages 0% nominal interest rate assets and investments.

Scooot
Scooot

My apologies.

Scooot
Scooot

In a normal economic environment nominal interest rates would never fall to zero. Who would risk lending for no return, there’s no point. It’s only central bank interference that causes them to approach zero.

I believe inflation just encourages people to get into debt. They gear-up to take advantage of the capital appreciation of assets whilst the value of their debt deteriorates in real terms. In the meantime the general population suffers a deterioration in their living standards as the prices of everyday items rise with no corresponding increase in wages. The demand for capital to gear-up, puts upward pressure on nominal interest rates, and mortgage and finance rates follow, resulting in a further squeeze on household finances. Whereas in a stable inflationary environment, decisions to borrow and lend are based on genuine investment opportunities.

Quanta
Quanta

You've branched out into a different topic. Yes I agree that having low interest rates for a long time like we've had since 2008 is a terrible idea. Money is borrowed on the cheap and misallocated. The chickens will come home to roost in a really, really, really bad way.

If we get back to the inflation topic, a little bit of inflation is good for the reasons that I stated. Regardless of whether investment landscape presents good interest rates or low interest rates. Over a period of 10-20 years, a small amount of inflation ensure that those who are "actively" investing, not necessarily into financial securities but into businesses etc. are rewarded, while those who simply hoard the money are "taxed".
It's a form of taxation that benefits those who are actively doing something productive. Of course too much inflation, and you get terrible policy as responsible savers are unfairly punished over shorter time scales.
The theory is that a little 1-2% inflation is not going to affect the little guy too much, but will affect large businesses - which is exactly the right idea. Unfortunately with federal printing going directly to the top, the implementation leaves much to be desired, nevermind that inflation rate is much higher than officially stated - so what we have today is NOT good.

Quanta
Quanta

In effect - inflation is a form of flat tax, which is fantastic at small < 2% rates. The only problem with U.S. (and global) implementation is that the inflation tax that top financial institutions "pay" comes back right into their pockets through central banks. If it could be made such that inflation would affect top and bottom equally, it is exactly the right idea.

Realist
Realist

My sincere thanks Scoot, for your apology. I appreciate it. Not very many people here are willing to apologize. That is very big of you.

Scooot
Scooot

You say that a small amount of inflation over 10/20 years ensures those who invest are rewarded, but it is also a tax.
I agree that it’s a form of tax, but not that investors are rewarded. They are only rewarded if they invest at an inflation plus rate or yield. Otherwise their capital is devalued and they’ve lost purchasing power.
It seems to me you are arguing that the little bit of inflation (tax) encourages people to invest when without it they wouldn’t. If so I don’t agree, they’ll invest if the risk reward dictates so not because of the inflationary stealth tax, or because a nominal interest rate is higher than it would otherwise be. In fact a higher nominal interest rate as a result of the inflationary tax might encourage them to leave on deposit rather than invest in something more productive.

Realist
Realist

My sincere thanks Scoot, for your apology. I appreciate it. Not very many people here are willing to apologize. That is very big of you.

blackswan
blackswan

anyone knowledgeable knows the answer is obviously 46

Eddie_T
Eddie_T

Are you saying Douglas Adams was wrong?

Quanta
Quanta

Any form of tax on the total of your possessions (not earnings), encourages you do something with that money, other than just keeping it cash form.

Scooot
Scooot

People don’t normally store their wealth in cash, they don’t need a stealth tax to encourage them not to. They just need an appropriate investment or savings opportunity with an appropriate risk/return profile. The inflationary stealth tax is just a convenient excuse for Central Banks and Governments to debase their currency and devalue their debt accordingly. As I said before, the resulting rising prices create hardship amongst the general public, encourage people to get into debt and exacerbate the wealth gap between rich and poor. It’s a terrible policy in my view.

CzarChasm Reigns
CzarChasm Reigns

Cluelessness abounds:

they just call it "operational error".

cknoas
cknoas

it is all trump fault. Period.

Casual_Observer
Casual_Observer

Electronic money is infinite.

bluestone
bluestone

You can tell what central banks are reacting to by what they want to influence. Powell's response to the deflationary clearing of debt, is to want higher inflation without higher rates. So I imagine from now on Powell will start to make more and more soothing comfort about "transitory factors".

Volcker for example, certainly -did not beat inflation- (although you might think he did from the press) because he didn't restore a historical 2% inflation rate. What Volcker did was preside over an organised devaluation of the dollar because you never get back the debasement of the 10%+ inflation years. Yes he didn't let the dollar collapse to zero would be a better assessment. He reined in the horse but he didn't bring it back to the stable.

From Powells point of view (or anybodies for that matter), would a devaluation of the dollar solve a lot of problems and I think the answer is yes. I would also point out that there is a lot of room for the dollar to safely go to. I know i said this before, but the dollar has been as low as 2.10 against gbp and it wasn't even all that dramatic. American holidays were cheaper, US exports were cheaper, nobody I saw at the time (2007) was burning dollars to keep warm.

Johnson1
Johnson1

The stock markets are awesome. The last 11 years have really benefited people who have aggressive portfolios. Truly amazing.

Then add in cryptos too.

Wow

Greggg
Greggg

Powell asserted that the FED has ample time “as inflation dynamics do not change on a dime.”

To the Fed chairman, I say this: YOU ARE WRONG FOR THE GLOBAL DYNAMICS ARE CHANGING. All the world’s central banks failed to achieve the coveted 2% inflation target because the Chinese were busy EXPORTING DEFLATION AROUND THE GLOBE. On January 1, 1994, the Chinese DEPRECIATED the YUAN by 50%, to 8.7 from 5.8 to the U.S. DOLLAR. The power of the Chinese labor force was unleashed to export to the world. Foreign money rushed in to China and along with the ASIAN TIGER growth excess capacity sent global prices into a tailspin.

This is what the FED and its beloved PHILLIPS CURVE failed to comprehend for the model was based upon domestic data.

KidHorn
KidHorn

The FED will always say inflation is under control. And their policies are working.

WarpartySerf
WarpartySerf

Jay and Janet ..... Two oligarchic Frankensteins - maybe it's time to break out the pitchforks and torches for these two predators......

Jay should take his personal $50 million plus , and Janet her $14 million plus- and join their buddies in New Zealand.

Just leave, will you ?


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