The Wall Street Journal author Jason Furman fires the opening salvo by mainstream media pleading for higher inflation targets.
The Fed Should Carefully Aim for a Higher Inflation Target
Please consider The Fed Should Carefully Aim for a Higher Inflation Target by WSJ author Jason Furman
The Federal Reserve has appropriately focused on a single objective for a year and a half: getting inflation down. While the war isn’t won, and I fear the hardest battles may be ahead, it is necessary to think about what victory would entail. In the short run, the Fed should be aiming to stabilize inflation below 3%. If it can achieve this goal, then it should shift to a higher target range for inflation when it updates its overall strategy around 2025.
If the Fed were adopting an inflation target from scratch, it would likely choose a target above 2%. A higher target inflation rate has costs, especially the time and attention people spend trying to account for how much their current dollars will be worth in a year or 10. But a higher target also has the benefit of helping cushion the economy against severe recessions.
If the Fed were adopting an inflation target from scratch, it would likely choose a target above 2%. The Fed, however, isn’t starting from scratch. The 2% inflation target, which was formalized in 2012 and has been reiterated innumerable times, has had some real benefits. People expected inflation around 2%, and for the most part that’s what they got. If inflation expectations hadn’t been so well anchored, the disinflation over the past year would have been much more painful.
There are two prerequisites for a successful transition. The first is to make clear that the Fed isn’t raising the inflation target merely to avoid the pain of getting inflation down. The second prerequisite is that if the Fed raises the inflation target, it needs to stick with it. It wouldn’t work to announce, say, a new target range for inflation of 2% to 3% and end up with 3.5% inflation. It would threaten the Fed’s credibility.
Mr. Furman, a professor of the practice of economic policy at Harvard, was chairman of the White House Council of Economic Advisers, 2013-17.
No Benefit to Inflation
There is no economic benefit to inflation. However, it does create winners and losers, with the winners being those with first access to money, especially the banks, the politically well connected, and the already wealthy.
I have discussed this many times before but it’s worth repeating again. Routine consumer price deflation is a benefit. It’s credit deflation resulting from the bursting of asset bubbles that is very damaging.
That’s not just my opinion, it’s the opinion of the Bank of International Settlements (BIS).
Historical Perspective on CPI Deflations: How Damaging are They?
For discussion, please see Historical Perspective on CPI Deflations: How Damaging are They?
Concerns about deflation – falling prices of goods and services – are rooted in the view that it is very costly. We test the historical link between output growth and deflation in a sample covering 140 years for up to 38 economies. The evidence suggests that this link is weak and derives largely from the Great Depression. But we find a stronger link between output growth and asset price deflations, particularly during postwar property price deflations. We fail to uncover evidence that high debt has so far raised the cost of goods and services price deflations, in so-called debt deflations. The most damaging interaction appears to be between property price deflations and private debt.
Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive.
Once we control for persistent asset price deflations and country-specific average changes in growth rates over the sample periods, persistent goods and services (CPI ) deflations do not appear to be linked in a statistically significant way with slower growth even in the interwar period. They are uniformly statistically insignificant except for the first post-peak year during the postwar era – where, however, deflation appears to usher in stronger output growth. By contrast, the link of both property and equity price deflations with output growth is always the expected one, and is consistently statistically significant.
The exception to the general rule was the Great Depression but, that was also an asset bubble deflation coupled with consumer price deflation.
In their attempts to fight routine consumer price deflation, central bankers create very destructive asset bubbles that eventually collapse, setting off what they should fear – asset bubble deflations.
Economists fail to see that asset inflation matters, not just CPI inflation. That’s another point Furman fails to understand. The Fed has blown several assets bubbles of increasing amplitude in a foolish attempt to create more inflation while totally ignoring massive inflation in housing and other financial matters.
Most economists have no idea how to even measure inflation and/or focus only on consumer inflation. The result has been problem after problem.
Inflation Expectations
Furman’s noise about inflation expectations is also a hoot. Fed studies and common sense both show inflation expectation theory to be total nonsense.
Second Fed Study Concluded Inflations Expectations Theory is Nonsense
Also consider A Fed Economist Concludes the Widely Believed Inflations Expectations Theory is Nonsense.
Here are some excerpts from the actual study:
The direct evidence for an expected inflation channel was never very strong. Most empirical tests concerned themselves with the proposition that there was no permanent Phillips curve tradeoff, in the sense that the coefficients on lagged inflation in an inflation equation summed to one.
In addition, most standard tests of the new-Keynesian Phillips curve suffer from such severe potential misspecification issues or such profound weak identification problems as to provide no evidence one way or the other regarding the importance of expectations (much the same statement applies to empirical tests that use survey measures of expected inflation).
What little we know about firms’ price-setting behavior suggests that many tend to respond to cost increases only when they actually show up and are visible to their customers, rather than in a preemptive fashion.
It is far, far better and much safer to have a firm anchor in nonsense than to put out on the troubled seas of thought. John Kenneth Galbraith (1958).
Few things are harder to put up with than the annoyance of a good example. Mark Twain, The Tragedy of Pudd’nhead Wilson (1894)
One should not need a study to prove the obvious. And it’s obvious that inflation expectation theory is nonsensical.
The reason has to do with the way inflation is calculated.
What Can the Fed Do About the Price of Food, Medicine, Gasoline, or Rent?
Stupidity Well Anchored: Absurdity of Inflation Expectations in Graphic Form
I discussed the silliness of inflations expectations theory in Stupidity Well Anchored: Absurdity of Inflation Expectations in Graphic Form
Inflation Expectations Q&A
Q: If consumers think the price of food will drop, will they stop eating out?
Q: If consumers think the price of food will drop, will they stop eating at home?
Q: If consumers think the price of natural gas will drop, will they stop heating their homes and stop cooking to wait for the event.
Q: If consumers think the price of gas will drop, will they stop driving or not fill up their car if it is running on empty?
Q: If consumers think the price of gas will rise, can they do anything about it other than fill up their tank more frequently?
Q: If consumers think the price of rent will drop, will they hold off renting until that happens?
Q: If consumers think the price of rent will rise, will they rent two apartments to take advantage?
Logically speaking, since the vast majority of the CPI is inelastic, and some of “everything else” is also inelastic, how can expectations matter at all? A Fed study concluded the same thing.
Asset Irony
People will rush to buy stocks in a bubble if they think prices will rise. They will hold off buying stocks if they expect prices will go down.
People will buy houses to rent or fix up if they think home prices will rise. They will hold off housing speculation if they expect prices will drop.
The very things where expectations do matter are the very things the Fed ignores.
Economic Wizards and Their Targets
Furman wants the Fed to stabilize targets below 3 percent then aim for something higher later. What is magic about 2 percent, 3 percent or any other number, given the fact there is no benefit to inflation at all?
The strive for inflation in a disinflationary world created massive asset bubbles and led to global wage arbitrage, outsourcing, and just in time manufacturing.
Now, we have gale force inflationary winds blowing stiffly in our face thanks to deglobalization, decarbonization, and inane energy policies of the Biden administration.
Don’t Worry It’s Only Temporary
The push for 3 percent, 4 percent, whatever percent is of course only temporary just as Nixon’s trashing the gold standard in in 1971 was only temporary.
We still pay the costs of that temporary move. In fact, all of the boom-bust cycles and exponential increase in debt dates to that event.
It would behoove economists to understand that point.
Bottom Line is More Inflation
Not only does Biden demand more clean energy, he also demands consumers pay the maximum amount for it, despite that being counterproductive to the main goal. For discussion, please see The Cost of Soup and Solar Panels is About to Increase, Thank President Biden
And president Biden has latched on to prevailing wages as discussed in Yet Another Biden Regulation Will Increase Costs and Promote More Inflation
No one has bothered to do any analysis of how the push to EVs does not scale or the infrastructure costs to achieve the goal even if the idea did scale.
My readers are far better informed than these alleged economic wizards. For discussion, please see What Do MishTalk Readers Think About “Electric Vehicles for Everyone?”
But, “It is far, far better and much safer to have a firm anchor in nonsense than to put out on the troubled seas of thought.”
That’s what made Furman the perfect choice for President Barack Obama’s chair of the Council of Economic Advisers (CEA). And as you can see, he still has the magic touch.
So the fed should rob us faster?
Nawww. If a large meteor with trillions worth of gold dropped, we would all be rich.
Hi Mish, etc. Once again you have used the term “mainstream media” to refer to a group of organizations and individuals that are so far left they can’t even see the American mainstream from where they are at. We have all seen many insulting names for these guys and although many of them should be called the Lamestream media, etc. lets call use an accurate name we all can agree to. That is the “Majority Media”. Don’t make it sound like you believe they are in the Main Stream. It emplys that you think they represent all of America. Thanks,
Those bus drivers we call captains of corporate planes are Marxist Leninists. Mostly big government veterans. Many are trump cult members too.
Communists for Trump? Better put down the bong.
Humor attempted old sport
The FED’s inflation target should be ZERO percent. There is no good reason why prices should increase each and every year.
Just look at these crazy increases by pilots at the major airlines! 46%, 34%, 40%! You are insane if you don’t think numbers like this are not going to keep inflation high and lock in higher prices for everything, from food to housing.
Again, all the lower wage workers who thought life would be easier with their pay bumps to $15-$20/hr are STILL going to be at the bottom of the economic pyramid and unable to afford any better lifestyle than they had previously when they were making $10/hr.
———-
American Airlines Pilots Ratify Contract Offering Big Raises
Strong demand for air travel and a pilot shortage have strengthened the ability of unions across the industry to win gains in pay and benefits.
By Niraj Chokshi
Aug. 21, 2023
Pilots at American Airlines approved a contract on Monday that will increase pilot compensation by more than 46 percent and includes other benefits and changes.
Under the contract, the pay of pilots at the company immediately increased an average of 21 percent upon ratification. By August 2027, total compensation will have increased more than 46 percent, including pay raises and increased retirement contributions by the airline. The deal is broadly similar to contracts reached this year by pilots at Delta Air Lines and United Airlines.
…
link to nytimes.com
Quite right, and everyone looks at those sort of rises and thinks why shouldn’t we get similar?
And this is why a loaf of plain wheat bread that cost 10 cents in 1935 now sells for up to $6!
I was in a local veggie store yesterday and saw that they selling pineapples at $6.99 each now. Some stores, like this one, have adopted the supermarket model of ‘let’s see how high we can get away with raising prices’. $6.99 for a pineapple is crazy. But then, so is $3.99 for a lb of tree fruit, like peaches or plums or nectarines but that is a common price here. How about a fresh roasted turkey with swiss on rye sandwich? $11.99 the other day at a local store !
Pineapples used to range from $1.99 to $3.99 and still do in many stores. Costco sold large ones at $2.99 for years and years. They now sell these same pineapples at $3.99 each.
This is why they’ll never target zero inflation. Although they should for sound finances.
Government tax receipts rise with the pilots’ and all wage rises, which of course enables the government to spend and borrow more. Its debt of course devalues simultaneously.
The government wants steady inflation over long time periods in a way that people hardly notice as it’s a stealth tax. They’ve been getting away with 2% but as it got out of control it affects votes. If they were to target a higher rate such as 3% they’ll find it harder to keep a lid on it.
It probably won’t stop them trying though because politicians are all short termist and self centred. Anyway you know all this.
Ha! UPS just approved their new contract. $49/hr to deliver packages. Sheese. That’s a $10/hr job if there ever was one.
——–
UPS Employees Approve New Contract, Averting Strike
The vote by members of the Teamsters union removes a potential threat to the economy.
Noam Scheiber
Aug. 22, 2023, 5:06 p.m. ET
Averting a strike that could have shaken the U.S. economy, the union representing more than 300,000 United Parcel Service employees announced Tuesday that its members had ratified a new labor agreement with the shipping giant.
The union, the International Brotherhood of Teamsters, said that its UPS members approved the five-year contract with more than 86 percent support.
The Teamsters have said that the agreement includes wage gains of at least $7.50 an hour for current employees over its five-year term. It also raises the minimum pay for part-time workers to $21 an hour from under $17, and raises the top rate for full-time delivery drivers to about $49 on average.
Under the previous contract, which expired on Aug. 1, full-time drivers made an average of about $42 an hour after four years on the job.
…
link to nytimes.com
It’s the $7.00 – $4.00 rotisserie chicken.
It’s $16/lb generic New York strip steak.
It’s the 14 oz pint of ice cream.
It’s my 11 oz 12 oz beer.
…
I prefer to look at the long-term chart of US public debt vs GDP.
link to longtermtrends.net
Our debt vs GDP is up to where it was at the end of WW II. Contrary to public perception, that debt was not paid down but inflated away.
Taxes were high, growth was high, and inflation was low.
Debt-to-GDP ratios are obviously contrived metrics. Unprecedented large deficits “absorb” a disproportionately large share of N-gDp (as gov’t spending is a component / factor of gDp).
To appraise the effect of the federal budget deficit on interest rates, it is necessary to compare the deficit, not to the debt to a GDP-ratio (a contrived figure), but to the volume of current net private savings made available to the credit markets (including concealing green-backing).
Houston, we have a problem.
I’ve always assumed the call for higher inflation targets is really a call for lowering interest rates to save the fat cats… and it will not work.
How does he feel about the Fed declaring higher inflation but will target interest rates 2% above inflation. Is he good with that?
There’s not a lot of long duration credit to inflate away. It’s all rolling over.
Link: Fiscal Dominance and the Return of Zero-Interest Bank Reserve Requirements (stlouisfed.org)
“imposing high reserve requirements for zero-interest paying reserves may seem quite attractive to a policymaker interested in reducing the inflationary consequences of fiscal dominance.”
And we knew this already:
In 1931 a commission was established on Member Bank Reserve Requirements. The commission completed their recommendations after a 7 year inquiry on Feb. 5, 1938. The study was entitled “Member Bank Reserve Requirements — Analysis of Committee Proposal”
its 2nd proposal: “Requirements against debits to deposits”
link to bit.ly
After a 45 year hiatus, this research paper was “declassified” on March 23, 1983. By the time this paper was “declassified”, Nobel Laureate Dr. Milton Friedman had declared RRs to be a “tax” [sic].
That figures. The FED deleted the unclassified document.
New URL
link to fraser.stlouisfed.org
GLAD to see you figured out we have cumulative non stop inflation for years now. if YOU would only figure out why the FEDRESNY was created, lots of your erroneous analysis will be corrected. THE FED HAS ONLY ONE MANDATE. it has private owners. the nyc banks. JPM and C own over 70% of shares. the FED is just reloading the bazooka so when the next hiccup occurs they will take over the regional banks out in flyover country. like they have been doing for over a century. i think it comical so many are so oblivious to the scam. quoting the BIS made my evening even more funny. i’ll tip my hat when i pass the FEDRESNY on friday on stroll to art class…………………..keep up the RE analysis. that’s your puppy. mucho appreciated
The deficits must be cut. The only thing untouchable is the interest expense.
Seems those union jobs are getting massive pay raises. Non-union red state types who are falling behind because of inflation are getting green with envy. And gaining a new understanding of the value of unions.
You mean like running industry after industry into the ground?
This country is run by the profit proclivities of the commercial bankers. It is driven by the ABA and a bunch of economists that don’t know a debit from a credit.
The widely held belief that banks lend deposits is to blame for an increasing GINI coefficient.
Link Richard Werner:
Prof. Werner brilliantly explains how the banking system and financial sector really work. – YouTube
Example; George Selgin “I’m glad to see, upon reading on, that Prof. Summers explains himself in the comments. Still, I was taken aback upon first seeing this tweet by him attributing SVB’s troubles to its having done what all banks always do! (borrowing short to lend long).
Never are the banks intermediaries in the savings->investment process.
true. but the boys who own FED set it up and run for themselves. most cannot handle they have spent half a century or more being ignorant to the scam. too much of a mind phuck.
If you want to deflate asset prices, you follow what Bernanke did to the housing market. Bernanke conducted the tightest monetary policy since the Great Depression. There was no increase in “means-of-payment” money for 4 contiguous years.
1971 wasn’t the problem. All hell broke out in 1965.
link to fraser.stlouisfed.org
The 39-year bull market in bonds was because banks don’t lend deposits. An increasing percentage and volume of bank-held savings became impounded in the payments’ system. This caused secular stagnation.
We have since C-19 reduced gated deposits relative to transaction’s deposits. This will raise interest rates.
Patrick Boyle on YT did a helpful, if simplistic, breakdown of the true cost of EVs and electrification… no-one seems to have paused to consider the implications of large numbers of people suddenly charging EVs and replacing gas stoves for electric ones will be… the short answer is, a surge in the price of copper, as the transmission line cables and pylons and transformers have to be scaled up… and the emissions cost of all this, as well as the price impact of increased and sustained demand for copper and other electrification metals rises…
Whilst the true cost of mass global electrification infrastructure rolls into the trillions of dollars, it’s certainly also true that there is a finite amount of oil. Even the roll out of things like tidal power, can’t escape the reality that the best long-term energy source for life as we know it on Earth, is out there in space… it’s the ultimate and necessary solution, not all these distractions on Earth. Beyond this century, humanity is going to need orbital power stations, both renewable and nuclear, to escape the finite fossil fuels, and the delusions of terrestrial “renewable energy”, that isn’t really renewable.
If the FED really wanted to declare defeat, it would hike rates well above inflation like Volker did, AND THEN KEEP THEM THERE FOR A DECADE.
Volcker told us to “watch the money supply”. And he let it go up, and up.
Volcker was ignorant and arrogant. Monetarism has never been tried.
Some people are never going to get it. Volcker failed for a variety of reasons. He caused the 1st recession by ignoring the distributed lag effect of monetary flows. Volcker implemented credit controls at the same time he was tightening credit.
But really it boils down to one big lie. It is a myth that Paul Volcker broke the back of inflation. He let the economy burn itself out. Volcker targeted non-borrowed reserves (@$18.174b 4/1/1980) when at times over 100 percent of total reserves (@$44.88b) were borrowed (i.e., absolutely no change from what Paul Meek, FRB-NY assistant V.P. of OMOs and Treasury issues, described in his 3rd edition of “Open Market Operations” published in 1974).
Powell understands what causes inflation, money printed by Congress, and war. He also understands what happens when a country’s inflation runs out of control.
I expect inflation to run higher for the next few years,along with interest rates.
Most younger people have not seen a Bear market in stocks. I expect this next downturn, which has barely started to be twice as bad as 2008. That goes for housing as well.
Money is not printed by congress or parliament or whatever equivalent. Money is created by commercial banks issuing loans. There is no inflation, there is policy-driven price rises… policies like “net zero” and “sanctions”. Reduce government, and reduce prices.
The simplest way for the fed to end inflation is just change the way they measure it. They have done it before and it has worked well for them.
Incidentally I went grocery shopping with my wife today, bought a tank of gasoline and got my homeowners insurance bill. I have great difficulty believing the current publicized inflation numbers.
You mean the $4 box of cereal that is now $6 corresponds to more than a 3% inflation rate?
4 X 1.03 is not equal to 6? Shocking!
“In the short run, the Fed should be aiming to stabilize inflation below 3%. If it can achieve this goal, then it should shift to a higher target range for inflation when it updates its overall strategy around 2025.“
How nuts is this!
We can’t catch all the thieves either, maybe we should only try to catch those that steal over certain amounts. Then once we’ve shown that improves success rates, update the law to permit theft over certain amounts.
Makes just as much sense!
Maybe we should all just stop accepting fake money as if it were real. Just a thought…
Respect your Fed. The Fed raided your money to control the long duration, for the
first time since Oct 2008.
I’m with you 100% on this, Mish. There are exceptions, but when you see Harvard economics department, brace yourself.
If consumers will eat healthy food 100,000 out of 250,000 junk food outlets will be closed. The cost of dentists, doctors, pharma, energy…bubble will be pricked . The more we pay the sicker we become.
If consumers will change their Standard American diet they will get less heart attacks, cancer, stroke…but the GDP will plunge and the unemployment will rise.
No economists on statin will agree with such a “radical” behavior.
Wrong. Other jobs and activities would replace those lost. Your argument is the equivalent of saying digging holes and filling them in is beneficial because it creates jobs.
No economist will ever accept such deflationary behavior.
Consumption is 70% of US economy.
Small levels of deflation are good for the average Joe. But they are bad for the investing class. If I owe $2 billion for some manufacturing plant I built on the expectation I could produce and sell enough widgets to cover the debt service plus a tidy profit, and price declines make one or the other impossible, then deflation is an evil that must be avoided.
And the government is owned and controlled by the investing class, not the average Joe. Unless you fix that, always expect inflation, which benefits the investing class.
Their costs would go down, so they could still make money under deflation, but, yes, deflation is bad for debtors, which is why the government likes inflation.
The other reason inflation is popular is that it prompts people to buy things before the price (nominally) rises. Deflation makes people hold off purchasing, waiting for prices to (nominally) fall. Consumer economies need inflation analogous to Voltage in an electric circuit.
(voltage, as in potential difference… a positive p.d. is like inflation, encouraging the current of currency flow in the form of transactions, with resistance analogous to bureaucracy and regulation; i.e.: there’ll always be some).
My $2bn manufacturing plant raw material costs should decrease with deflation. The debt could be reamortized at the lower interest rates that would come with deflation.
Bottom line, profits should continue, albeit different – maybe better, maybe worse.
I agree that the Fed by keeping interest rates so low for so long created the wealth gap which has caused a tremendous amount of maybe some envy, but mostly anger and resentment. So because of the fairness issue can you blame the American Airline pilots or the United Auto workers for their demands at this point? The economic problems we face cannot be solved by simply raising interest rates and raising taxes because there is too much debt! Higher rates are already reducing economic growth and higher taxes will reduce growth even further while increasing unemployment. At some point higher rates will cause something to break and the Fed will once again be forced to liquefy the banking system which will spike the inflation rate leading to all kinds of messy controls. Something has to be done about debt.
The economy couldn’t function in a deflationary environment. A market economy seeks a final market price that is higher then the sum of the input prices, otherwise things won’t get produced.
In fact, a market economy is inherently inflationary. If a loaf of bread costs $1 to produce, it must be sold for more than $1 to generate a profit. Nobody is going to sell bread at cost or below cost.
Making a profit is not inflationary.
Profit is inflationary. In order to pay for the profit (let’s say 10 cents profit on a loaf of bread) it requires the buyer to offer 10 cents of value from somewhere else in the economy in order to meet the market price of the bread.
Debt helps balance the economy by putting money into the hands of people who need it to purchase the bread,
Better go back to Econ 101.
(Nominal) price is not (Real) value; but it’s true that inflation is a requirement for a consumer economy to function. Deflation prompts saving and cautious demand.
Who saves with negative interest rates that would come with deflation?
It depends upon the level of deflation. Many would save if the dollar buys more next year. And deflation doesn’t mean negative interest rates, though they likely would be lower.
“In fact, a market economy is inherently inflationary. If a loaf of bread costs $1 to produce, it must be sold for more than $1 to generate a profit. Nobody is going to sell bread at cost or below cost.
”
Yeah! That makes sense! Obviously nobody would produce computers, unless they got more and more expensive every year…..
And I always wondered why Zimbabwe produced so much more of everything; from cars to electronics to tools to bullet trains; than “deflationary” Japan, where falling prices obviously ensured nobody would produce anything…
Also: Don’t try your hand at running a perishable goods business, like a bakery, unless you are willing to sell about-to-go-stale bread at a sizable discount under sunk production cost…..
And then, recognize: ALL goods are ultimately perishable. They just depreciate at differing rates.
I suppose the sole exception, is so called “financial” goods: As long as, and only as long as, central banks can keep inflating/redistributing-from-others fast enough to keep dilettante-class buyers/owners of such goods from ever; no matter how stupid their harebrained “investments”; having to recognise a loss. But: Sooner or later, even central banks and dilettantes, do run out of other people’s money to steal by debasement….
Ignore the advice of any economist from an Ivy League university, MIT and Berkeley.
i listen to fred the butcher and ethel the deli lady more closely. NOT a joke. reality of a life in village of king county NY
The Fed is irrelevant. They control and determine jack squat. Other than temporarily being able to affect the short end of the Treasury curve, they have no monetary tools. Thus expectations are paramount to them, because the one tool they believe they have is psychology—that they can both defeat and create self-fulfilling prophecies in the financial system and economy. That way they can continue the illusion they are important. But look at the yield curve. Global investors are literally thumbing their nose at The Fed’s attempts to control interest rates today, as they have for many many years.
Does anyone really believe that rates are going to rise to Greenspan’s step level? no. the Fed will eventually capitulate to the ongoing liquidity crisis, and the short end will breath a sigh of relief and plummet, pulling the long end down with it.
The deflationary vortex that started with the FedWire “glitch” (but really in 2008), will suck any inflationary pressures into it like a black hole. As deflationary money has always done. And the coming QE will only make things worse, albeit marginally. The monetary system is begging for liquidity and QEs suck more of it out of the global system.
Deflationary recession and creative destruction might be the only way through. Global banking has never regained the confidence and trust it had prior to 2008. Bear Stearns still looms largely in every institution’s head. Liquidity has been tight ever since.
Back in the day, people knew The Fed was irrelevant. It’s attempts to do anything constructive were regularly laughed at on the front pages of The New York Times, WSJ, and other major newspapers. They were blamed for The Great Depression and no one paid them any heed until The Fed used the Volcker myth and media allies to rehabilitate its image. But that was a myth based on lies, as was Bernanke fixing things during the GFC. Yes, he got a Nobel Prize for that crisis, from the Reijksbank, as central bankers everywhere need to maintain the myth they are relevant. They are not. It’s all part of the psychology, the credibility. Maintaining that credibility was why Powell raised rates in the first place and the Treasury market has subsequently turned him into the same laughingstock as previous Fed Chairs.
If you’re looking for any Fed policy to change any of this reality, best of luck to you. They have zip, zilch, nada effect. The crisis and deflationary recession will march on regardless.
The real focus should be on politicians who continue to spend dough they dont have and piss it away on wars they dont win. Lots of money for war, not so much for Social Security which is supposed to run outta dough in 2032…..just sayin.
We are hardly scrimping on Social Security. Most beneficiaries today are receiving more than they put in.
…nominally and superficially… some contributions, such as “caring” (as in social care) are not accounted for, yet are an economic contribution in the form of money that is not spent. This applies moreso perhaps in Europe than USA.
my ROI on my measly self inflicted small salary of many LLCs………and S corps…………is huge.
Since I didn’t get a say in how much I had to put into SS, YOU DO NOT get a say in how much I get to take out. If you wish to gripe about retirees collecting PAID FOR benefits, start with city, county, state, and federal employees who take more than they “gave” after say 20 years of working.
I don’t determine the benefits – the federal government does. It’s a somewhat arbitrary formula loosely tied to one’s contributions, with a redistributive bias. Your SS benefits are NOT “paid for,” but are paid for out of current revenues. Currently, the system is unsustainable, with more money going out than coming in.
I think Michael Pettis has it right. The tradeoff is between easy money and unemployment so the CB’s go with easy money. He points out this drives continuing increases in wealth inequality increasing political instability.
The solution is politically difficult. If CB’s go with easy money eliminate sales taxes, bring back hefty inheritance taxes on wealth, make Social Security taxes progressive and completely overhaul Federal Income taxes making them far more progressive. Overhaul corporate taxes so corporate expenditures on anything involving corporate owners or high-end employee gratuities are taxed.
CB’s policies over the last 30 years of monetizing debts on the backs of the middle class and the poor should be reversed. Life should not be like a backwards video game where it’s far easier to make more money in unfair ways smacking of socialism for the already wealthy while the poor get to experience bare knuckle capitalism.
The US GDP growth has been getting more and more anemic even with unbelievable strides in worker productivity. I think it’s due to kleptocratic controls over capital, it going primarily to rentiers and financialization, and an excess of debt spawned by artificially low interest rates and excess capital creation by banks.
Don’t think change isn’t coming. The younger generations in the US are not gonna put up with the current arrangement much longer..
“The tradeoff is between easy money and unemployment so the CB’s go with easy money.”
There is absolutely NO economic mechanism, whatsoever, upon which such a relationship (Phillips curve) can be logically built.
Heck, even among the denizens of the logically challenged ghetto (papermill-beneficiary “degreed” dilettantes; who are too dumb to to think, so try to appear relevant by taking the easy way out; “citing studies” to settle questions of pure logic; instead) it keeps getting refuted over and over. Most famously by Friedman.
More recently, Hyman Minsky enjoyed a stint as a household name among the namedropping-dunce “ownership society” classes. Pretty much specifically by showing how, at least in fully financialised economies lie ours, the very act of “helping cushion the economy against severe recessions”, by itself, no matter how it is achieved, is exactly what increases the severity of recessions to begin with………
There never have been, never will be, ANY means by which anyone (God excepted perhaps) can “manage” “the economy.” People themselves, don’t even know what their individual utility functions will be, a second form now.
Neither are there any strange, mystical, universal economic “relationships” which can be found examining tarot cards, palms, coffee grounds nor graphs of arbitrarily selected variables.
Heck, there isn’t even such a thing as “unemployment.” Or, if there is, it’s a good thing. It’s called leisure. It’s nice. More people should try it sometimes…
Noone minds being “unemployed.” Only being underpaid. Yet the card carrying members of Idiots United, are so singularly logically challenged, they fail to even notice how completely ridiculous it is; talking about “horrible” “unemployment” in one sentence, while serenading Fed theft beneficiaries “lucky” enough to be able to retire early off their “assets,” in the next….
Can’t make this stuff up….
Oh: And, being “underpaid”, is exactly what is made worse by inflation….. For pretty much everyone, except a small cadre feeding directly off of central bank printing, hence having the money which were made by others, transferred to them. That’s very simply, very easy to deduce, economics.
But I suppose it makes dumb people feel good, to make up nonsensical hobgoblins like “unemployment”, then try to appear all “smart” by making up equally nonsensical “relationships” and “graphs” and “experts’ opinions” about all the trivially nonsensical drivel they made up and babble about.
CBs are not irrelevant, they are just not relevant in the way they think they are.
I’m going to assume this comment was addressed to me, since I introduced the term “irrelevant” into the thread.
Are you one of those “courageous” people who flatly disagrees and then provides zero supporting evidence for their contrary stance? We should just all take your word for it, with bonus points if expressed pithily?
State in what way the Fed is relevant beyond being the janitorial crew after yet another institutional failure (which itself is not pertinent to the discussion of The Fed as inflation fighter).
No, I’m one of those people who observes that a significant number of people (rightly or wrongly) pay attention to CBs, and act accordingly.
Your argument may as well extend to saying any number of things are “irrelevant”, and they might be, technically, but they still not be, empirically, for the simple reason that plenty of people consume and follow garbage.
Bear in mind that I’m not a seppo, and I couldn’t care less about “the Fed”.
1. The US already has the most progressive tax system in the world.
2. There is no tradeoff is between (easy) money and unemployment.
On the topic of inflation, american airlines pilots just score an immediate 21% pay raise. American wouldn’t be doing this unless they anticipate high demand for pilots and travel.
link to cnbc.com
“The more than 15,000 pilots at American will get immediate raises of 21% with compensation rising more than 46% over the duration of the four-year contract, including 401k contributions, their union said Monday.”
… or they have a bunch of retirements incoming.
Lol…you have been paying attention…you get a gold star.
They received plenty of bailouts in 2020, 2009 and 2001, at least. If they and United disappeared forever it would be beautiful thing.
Being an airline pilot sounds glamorous, but its actually a pretty miserable job once it becomes routine. When the Trump administration shut down the airlines during COVID, tons of pilots found out there are a lot of better jobs out there. Maybe they don’t pay as much, but the lifestyle can be dramatically better. Especially if you’re married with kids. Right now, pilots are in extreme demand, and a lot of experienced pilots have walked away from the industry. What this pay increase is showing is that demand is outstripping supply and the industry can afford to pay higher wages at some cost to shareholder returns.
And higher ticket prices!
they are glorified bus drivers.
Except if the Bus Driver suddenly was unable to drive the bus, pretty much any passenger with a drivers license could slip behind the wheel and drive the bus at least well enough so that it could be pulled over safely.
Doubt there is 1 person in a 1000 on a plane who could do the same.
They can let the computer land it.
– American wouldn’t be doing this unless they anticipate high demand for pilots and travel.
Well if they are, then American will be laying off a whole lot of pilots and looking at a travel stand still very soon. They will also be out of business financially anyway, for their stupid cave in to the Unions.
We are about to enter one of the worst recessions that this Country has ever seen IMO based on the Facts on the ground anyway. Travel will be minimal, as business has dried up and money to travel for business has dried up with it. It’s called the digital age for a reason. If the majority of companies can survive with most employees working from home, then why do we have to fly (other than an excuse to have fun on the business dime) anywhere for business? We don’t as a general rule any longer, and that is proven by what I just stated above.
So higher wages now being paid to airline personnel, that will have no work (my friend, a pilot, has been getting paid to sit at home, way more often than fly, for well over 6 months now), and they won’t be worried? Airlines paying vastly more labor cost for idle air travel will do great for there bottom line I’m sure…
We have a massive CRE Crash coming, a massive Homeowner Foreclosure crash coming, and the Country is in debt up to its eyeballs, along with its Citizens. Good luck with any economic recovery in the next 2-3 years I would guesstimate at the earliest.
We have not even begun to write down losses, as the Government keeps propping everything up to look good, but it’s so self destructive, that it’s actually eating itself alive with the decisions they are making.
The War in Ukraine is a perfect example of Wasted Taxpayers $$$ that we can’t just replace, as it took years of tax revenue for those amounts of dollars being siphoned off of the U.S. Economy for absolutely nothing…
“Q: If consumers think the price of food will drop, will they stop eating out?
…
Q: If consumers think the price of rent will rise, will they rent two apartments to take advantage?”
If all that is out there are dimwitted consumers then I guess you’re right but I don’t think the world functions that way. If I think food prices will drop, I will short (buy puts) on food producers like Tyson and Cal-Main or Conagra foods.
If I think natural gas, rent, fuels or whatever is going up or down then I will invest accordingly and so will most investment class people. I have been short (via puts) on homebuilders because I thought home builders would crash with 8% interest rates and perhaps I was wrong and have a few more months to find out. While I’m not rushing to buy or sell REITS that’s the next logical step once rents adjust.
The economy doesn’t just consist of consuming drones, society is far more sophisticated than that these days.
As for the Fed, they’re gonna do whatever they want and no one will question them, all we can do is profit from their actions.
“If all that is out there are dimwitted consumers then I guess you’re right but I don’t think the world functions that way. If I think food prices will drop, I will short (buy puts) on food producers like Tyson and Cal-Main or Conagra foods.”
I think you are bleeping nuts.
The average consumer has no idea what a PUT is let alone understanding the risks.
Buying Puts or calls on Tyson as a hedge is nuts.
If you think the average person could do what you say, you are totally clueless in some sort of bubble of your own making.
Why would you just auto-buy puts on the food producers if you think the price of food is going to drop?
It may be dropping because the raw input costs (beef, chicken, veggies etc) are dropping and that’s just being passed on to consumers without any change in the bottom line of those companies.
It only makes sense to short them if you think they are going to be profit squeezed from that price drop in some manner. It’s a more complicated decision than it looks like since food producers don’t hold onto raw inputs for long periods of time (unlike say home builders).
Exactly and thank you for making my point. Everyday, decisions require some level of thinking, analysis, and strategy. I was merely making an example, I can’t write entire treatise here as a comment so I have to be brief but at least you get it.
I think the average consumer is way smarter than they are given credit for and we all started as below average consumers at some point. I certainly didn’t know how to trade options or do much of anything else at 18 but we are at a point in society where we are top heavy seniors and older people in general, if people haven’t learned to trade or hedge at this point then America is truly lost and hopeless.
“ I think the average consumer is way smarter than they are given credit for ”
Prepare to be deeply disappointed.
The average consumer would be the 60% of adult Americans living paycheck to paycheck. I would scratch that as a starting point for “smart” and move on to the average person earning 100K or more which is roughly 15% of the population. Probably a good chunk in that bunch getting smarter.
“If I think food prices will drop, I will short (buy puts) on food producers like Tyson and Cal-Main or Conagra foods.”
ehhhh-ok??? I suppose.
So if you think food prices will drop; you’ll still buy the same amount of food.
And you will also buy some paper…. Again, OK, I suppose.
Will you buy some crayons too? And would that also be of relevance? What about a bong? Lots of things to buy out there, which are not food.
I tend to agree with you on hedging with long dated puts rolling over. I’d be long gone before expiry, though.
To the naysayers: yeah, those guys with the colorful smocks getting sh-t faced at The Cactus in Chicago are/were real geniuses.
Inflation is not only theft, but it is entirely parasitic. Think of all those who gain as a parasite living off of the all those who end up paying the price to keep those bastards alive.
So the Fed feels the need to steal my money/purchasing power faster.
Why am I not surprised.
What they are really admitting is that the government needs to inflate away the debt.
No. This is an opinion of a water carrier for the Wall Street banking cabal.
“Mr. Furman, a professor of the practice of economic policy at Harvard.”
Money is just a proxy for who gets what. If there’s not more what, everybody can’t have more of it. We need to declare Unlimited Wants for what it is… a mental disease.
“Money is just a proxy for who gets what. If there’s not more what, everybody can’t have more of it. We need to declare Unlimited Wants for what it is… a mental disease.”
Not sure how successful “declaring” what other people should want would ever be….
But the easy, reliable, always and everywhere perfectly applicable, solution to that riddle, is to simply stop printing, and handing out, more proxies.
The proxies allow you to fool the insatiable masses into thinking they got ‘more’. Absolutely critical for maintaining civilization.
Except the masses are fattened up as though they knew the end of civilazation was neigh.
The masses don’t know what they had for breakfast. We are a species of bipedal goldfish.
century of the self. best documentary on subject of wants sold as needs to pax dumbphuckistan past century.
The Fed should pause, wait for the lag affect of shelter to catch-up before deciding on additional hikes or cuts. Everyone knows that shelter has a long lag the way it is factored into both the CPI and PCE. The Fed should stop reacting in real time to lagged statistics.
Shelter doesn’t have a long lag on the way up. As soon as the FED utter a hint of pivot, mortgage rates and property prices go up like a champ.
That was meant mortgage rates go down, property prices up.
Shelter costs don’t include house price inflation only rent and OER. Another joke the politburo plays on the proletariat to make them think all is well. The are lies, there are damn lies and then there are statistics.
Let’s OER homeowner survey our way out of housing inflation.
ROTFLMAO!
The BLS changed how rent was calculated last year. Nows the time to do the same with housing. Go back to the way it was pre-1983 when the big changes in CPI calculation were impemented.
When’s the next recession call post?
Zero Hedge was reporting this morning that 52% of small businesses believe we are in a recession.