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Comment by MrPowers | Hacker News Reader

The Fed was initially saying the inflation was transitory, but have recently dropped the "transitory" label.

Back in July, Siegel pointed out that the M2 money supply is 30% over pre-pandemic levels and predicted that would translate into 20% cumulative inflation over the next 3 years. Here are my talk notes / video links if you're interested: https://neapowers.com/investing/jeremy-siegel/

In July Siegel said "There is zero need for the Fed to be buying $120 billion in bonds every month given market conditions." I don't know why the Fed is buying mortgage backed securities in the midst of an apparent housing bubble.

Larry Summers was voicing inflation concerns back in March: https://www.youtube.com/watch?v=PBnaahSe7JU&ab_channel=Bloom...

The main macroeconomists I follow (Siegel, Gundlach, Summers) are all puzzled by the Feds actions recently.

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There's also an element here people don't talk: Covid created insane amounts of hard-to-repay debts. If interest rates go up quickly, the Govrermnent will suddently have to spend a lot of its budget on interest - expected, of course, but not something they are used to.

In NYC, many restaurants and property owners survived thanks to debt which will eat into their profits for years to come and may even bankrupt them down the road.

What is the answer to overwhelming debt? Inflation. Inflation makes the principle that you owe a lot cheaper and if you have borrowed in fixed interest rates, it makes the interest payments cheaper as well.

It would help both the government and the businesses mostly affected by Covid to run high inflation for a few years. This may or may not be part of the Fed calculation but I don't understand why nobody talks about it.

Inflation is NEVER the answer.

Inflation taxes money, but not hard assets.

The poor have their week's worth of money that then gets taxed an extra 10-30%. The middle-class may sell some assets and be partly hit as a result. The wealthy will just hold their assets until the market settles down and lose nothing.

This is the exact opposite of a good economic solution.

The poor owe a fortune in debt to the wealthy, inflation wicks this away

As long as wages increase with, and they have to. If the poor can no longer as a whole afford to pay $1k in rent because the money goes on food, then they won't, and rental prices will have to come down because the demand for rental at $1k crashes (as nobody can afford it)

> This is the exact opposite of a good economic solution.

The system is built by and FOR the wealthy. The system is working exactly as designed: to hold down the middle and lower classes, giving them just enough to be happy but not enough to emerge from the rat race.

GDP per person in the US is around $50K. Some of the GDP has to go to investment and the government, so at best people can consume on average $30K worth of products/services per year.

Would you be happy consuming just $30K/year? I didn't think so.

The ratrace is not a matter of absolute numbers, it's because everyone wants to have more than their neighbors have and more than what their parents had. Also, everyone seems to want to spend 20% more than what they are making hence most people in the country are in (consumer) debt. Government is no exception and mirrors the behavior of the citizen.

This whole thing about the rich not giving enough money to the poor to keep them working is BS.

> It would help both the government and the businesses mostly affected by Covid to run high inflation for a few years.

The government is screwed if interest rates are high. They roll over their debt on an ongoing basis, and if interest rates go to even just ~5 percent then a huge chunk of the annual tax revenue will go to just repaying interest on the debt. The government (read: the people) cannot afford to have that happen unless drastic spending cuts accompany it. Recent events show that most legislators are interested in ramping up spending, not ramping down, which basically means that inflation would have serious consequences for the budget and economy.

Exactly, inflation is a detriment to those with lots of dollars, those who have lent out dollars, and importers/consumers of foreign goods.

But it can also benefit owners of physical assets, borrowers of dollars, and exporters of domestic goods.

I’ve been hearing people call this a soft default.

I don't know if you were being rhetorical, but the Fed's motivation doesn't seem like that big of a mystery. They're succumbing to political pressure not to induce a recession or allow asset prices to drop.

As far as I can tell, the political class decided that no cost was too high to avoid being the one left standing when the music stops, after the '08 crash. So we'll just inflate until someone gets unlucky and is the one stuck with the blame for a massive crash rather than 2-3 smaller recessions inconveniencing some other politicians, who are actually the ones to blame for the whole situation. [EDIT] actually, arguably, the '08 crash was already an in-the-works recession delayed and made worse by exactly this kind of thing.

Another possibility is that someone realized something really awful, like that the global economy had shifted such that anything like the "asian contagion" crash (no, nothing to do with COVID[0]) can't be contained next time, so they're desperately trying to keep the plates spinning until they can figure something out, because they expect the next major crash will be a true global depression and don't know how to stop/mitigate it if it's triggered.

[0] https://en.wikipedia.org/wiki/1997_Asian_financial_crisis

If the bubble pops, those securities are generally worthless. If I didn't know better, I'd say this is a move to bankrupt the US government. As it stands, it is idiocy and will bankrupt the government if things go sideways in the housing market.

Though, given the rate of inflation, the housing market may not pop as land is a secure asset that the wealthy are getting into.

They're buying those securities with printed money. It won't bankrupt the government, it will tank the dollar and everyone who has dollars, gets paid in dollars or loans dollars. Those borrowing dollars to buy assets and offload liabilities will be fine.

The first people getting those borrowed dollars (government contractors, banks selling treasuries and MBS, old people on social security) will be okay.

On the flip side, it will benefit those who don't hodl $USD, those who borrowed dollars, and exporters of U.S. made goods.

Big opportunities in manufacturing and agriculture, risks in finance and communications.

https://www.lynalden.com/fraying-petrodollar-system

> It won't bankrupt the government, it will tank the dollar and everyone who has dollars, gets paid in dollars or loans dollars.

Can you expand on this? How does that work?

Since the dollar is an entirely Fiat currency, its supply is dictated purely at the whim of the U.S. Government.

This means that they can turn on the presses (or these days, make some keystrokes) and instantly have as much money as they want. Because of this, if there are outstanding debts that are denominated in USD, the government will always be able to have that money on hand, or create it.

The problem is that this puts more dollars out in the world. And if there are more dollars in circulation, everyone (on average) has a little bit more they can "bid" on consumer goods. Because of the law of supply and demand, things inflate in price.

The Federal Reserve is not the US Treasury. The Fed buys these mortgage-backed securities with money printed out of thin air. Likewise, the dollars disappear again as the mortgages mature. If the securities default, everyone who owns dollars bears the cost in the form of inflation, not the Fed.

It was obvious to anyone with an iota of critical thinking that it was not transitory. The way the government just printed billions of dollars was bound to result in inflation.

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