How Not to Fight Inflation
newyorker.com
newyorker.com
Frankly I don't think the groundwork has been done to really figure out what the root issue is here. There are so many candidates - the handouts, the years of government-shutting-down-the-economy through COVID, the financial crisis that was looming in late 2019 that got obscured by the pandemic, a possibly peak-oil related energy crisis, war in the wake of all the other problems. But there are a lot of political shenanigans in the banking sector to keep the status-quo, and the status quo was shown to be "incompetents are in charge" in around 2008. So it is unlikely that they are up the the challenges that the world is facing.
Just like fires destroy, they also clean - and economic downturns do similar things, thinning out the companies that have no excuse continuing and strengthening the remainder.
Since economic policy is now dedicated to keeping the companies going vs keeping everyone housed and fed, those companies can survive the downturn and end up "too big to fail".
There's also perhaps something to be said about more and more of the "economy" being optional spending of various sorts.
That is complete nonsense. Permanent money is always in disequilibrium, by avoiding interventions that result in temporary equilibrium you basically just get stuck with opportunity costs. You should rather question why we have modelled money to be permanently in disequilibrium so that it constantly requires interventions to keep it alive until its inevitable collapse. Permanent money is guaranteed to collapse because of its structural disregard of the real economy so the best you can do is keep it alive as much as possible, liquidationism just shortens the lifespan of your permanent money system.
Isn't it quite ironic that permanent money systems don't last very long? It is particularly amusing that everyone thinks that permanent money collapses because of government meddling when it collapses on its own just fine. The best part is that people keep repeating the permanent money experiment over and over again over the last two thousand years and they all reached the same conclusion: it doesn't work in the end but we will do it again
Isn't it ironic that money that abandons permanence can essentially last forever?
What? We know what the root issue is very well, it is liquidity preference. People prefer money over goods and services.
For the US, I find this hard to believe. How can it be a liquidity preference when a majority of Americans live paycheck to paycheck? Unless, we are counting corporations as "people" in this context. Then perhaps, I would agree.
This article does not bring up the key issue that we have had in last 15yrs post GFC - motivation of having endless QE. At some point everyone knew there would be repercussions but everyone looked the other way and was like “trust the fed” or “don’t fight the Fed”. Just kicking the can down the road.
Well now Fed has its hands tied. It can’t raise rates too fast or the economy craters. The other option is let the inflation run hot.
For example, why did the Fed went out of their way last year calling it transitory?
The correct solution to avoid being at the wim of such friendly countries as Russia, Saudi, and China would be for Japan, Europe, the US, to massively invest in increasing internal free (renewable) energy sources, and diversifying strategic imports like silicon chips.
From 2015-2017 in the US renewable production increased from 558TWh to 710TWh, a 13% increase per year. Staying at that rate for the next 5 years would have put US renewable at 1,300TWh today or 31% - 500TWh more than today, leaving 500TWh of gas and oil to be used elsewhere and reducing the power of Russia and Saudi over the global economy. By 2030 the US would have hit 3,500TWh, up to wards 100% of current electric generation, and by 2040 at the latest to include the extra electric load from things like battery cars.
But instead the US didn't.
Point is Fed has done a lot of damage. In a functioning democracy, Fed chair would be summoned by congress and Fed would be held responsible for not keeping its dual mandate - price stability (which inflation is causing wreckage) and unemployment ( from an impending recession). If a Fed agency can’t keep its mandate, it’s time to look at its validity.
But of course our elected leaders won’t. They love nothing but delegating to unelected agencies full of so called experts so they don’t have to make hard choices/decisions and bear the consequences from voters. So they just shield themselves with experts.
That changes demand, not supply, as you astutely observe. Fed has no tools for supply, by design.
That's why they've pushing back on the US govt recently, talking publicly about how current inflation is 30% due to demand (oversupply of money, low interest rates) and 50% due to supply constraints (food, energy, and Asian supply chain slowdowns). They're telling the US govt that solving inflation will require govt and private sector solutions to the supply problems. The Fed has no tools for those.
The correct answer is nuclear and investing in our own fossil fuel industry.
Furthermore you are advocating for supply side economics. Totally agree - we need to cut taxes massively on business and encourage everything we can do for the private sector to invest in more supply production - of everything! But the left endlessly attacks business and sees them as the enemy, which results in less production and higher prices.
Fantasy land everywhere.
If they just let market run its course, we'd have a severe recession caused by shutdowns and job losses in early 2020. Demand for consumer goods would be significantly reduced and the crippled supply would be sufficient.
If I were to guess, the labor supply for those types of jobs will continue to decline, so I do not think there is any short term way to counter that factor of inflation without lowering expected quality of life or some miraculous automation innovations.
They don't have to be miraculous. In the UK, Brexit has caused the supply of ultra-cheap East European fruit-picking labour to dry up. Fruit growers are consequently now investing in automating fruit-picking.
Automation is simply engineering; these problems don't require miraculous inventions. Anyone can build a machine to pick a strawberry. The trick is building one to a price-point, that can pick an entire polytunnel clean, without damaging the fruit too much. It's not innovation, it's just applying stuff we already know to solve practical problems.
In 2019 it was 7.73, despite interest rates having dropped from about 6% to under 1%, making mortgages far more affordable. The monthly cost of buying a home (which is what mainly drives the price).
In 1997 it cost 27% of the median gross income for a 90% 30 year mortgage on a median house at the 7% base rate.
In 2007 it cost 44% with a rate of 5.25%
In 2019 it cost 25% with a rate of 0.5%
Today it costs 32% with a rate of 1.25%
How do you explain Quantative Easing from 2007 to 2019, coupled with historically low interest rates, barely touching house prices. How do you explain house prices doubling from 1997 to 2007 without Quantative Easing?
Or did the QE in the UK not go into real estate market?
Instead, you should be looking at the top locations that attract investment capital, such as London, which has experienced a much steeper price trajectory:
https://pearsonblog.campaignserver.co.uk/wp-content/uploads/...
They warned that massive investments into windmills and solar MUST be accompanied by massive investments into the grid, and that Germany fails spectacularly in the latter, especially because of onerous regulation and incessant NIMBYism. Namely, a lot of power from renewables is being produced in northern Germany and the shallow seas around it, where the country is only sparsely inhabited, and it is almost impossible to get this power in adequate volumes to the consumers in the highly developed and power-hungry regions in the south - Bavaria, Baden-Württemberg.
One of them also stated that Germany managed to build only about a fifth of the necessary network of new power lines in the last decade.
Greetings from Europe. It is not really any better here. Logistics is hard. Logistics in electricity doubly so.
The only things that have a strong correlation with recessions are rising interest rates and balanced budgets. So maybe we should stop doing the things that are known to cause recession?
Debt is money and that an economy needs money to function. And if an economy is growing, it needs more money, which means either more personal or more corporate or more government borrowing.
There's an alternative, which is to ask whether something EVEN HAS A CHANCE of being relevant in 10 years. Experimentation and risk-taking is fine, hamster-wheeling and "bullshit jobs" are a waste of life and destroy the earth, for little benefit.
Slap on sunscreen, then use statins to counter the high blood pressure (rather than get free exposure to the sunlight we all evolved to live under).
Have both parents in full-time employment, while kids get warehoused in daycare.
Overwork people to the point they have neither time nor inclination to cook for themselves from scratch, instead using meal kits, ready meals, takeout, restaurants.
Alienate people from their own bodies with manipulative marketing that weaponizes their insecurities against them, then patch up the self-esteem with totally unnecessary cosmetics, gyms, fashion, surgeries, etc.
All these activities fatten GDP, but which of them really represent human flourishing?
We measure the wrong things, at least in part because the right things so often cannot be measured. We need to trust in the unmeasurable, but that is antithetical to the technocrat.
I have always thought most of the sunscreen products we have today have shady ingredients by just looking at the list of endless number of chemicals. I mean why do we need 50+ chemicals in a product when just zinc oxide can do. This was confirmed when Neutrogena last year had to tee all some of their sunscreen products last year. Increasing blood pressure is a new one I haven’t heard of before.
The interventionist’s prescription, though, is to always wear sunscreen, to take vitamin D supplements, and to take statins to control blood pressure.
I suppose my original point was that this represents a perverse exercise in ditch digging and filling. Using one expensive product to block the sunlight we evolved under, then using yet more products to compensate for the disrupted natural functioning of our skin (which we likely don’t fully understand anyway, so the counter-interventions are a partial remedy at best).
[1]: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6830553/ [2]: https://pubmed.ncbi.nlm.nih.gov/26992108/
I sympathize with this sentiment, but it's impossible in practice to reliably predict what will be relevant in 10 years.
Also, I don't believe it's possible to get the signal without the noise. I've even come to believe the noise may be the generator of signal. We live in a probabilistic universe, not a deterministic one.
Perhaps the problem is a steady state versus growth model economic configuration, and we also need finer grained control over stimulating or discouraging very specific economic activities.
This is the vast majority of homeowners in most countries.
Which also spills into rent costs, of course.
Please excuse my economic ignorance.
In the absence of money (or debt), we are reduced to barter. I give you a donkey, you provide me with grain for a month.
But suppose you don't need a donkey? Well, you can trade it for something you do want; so the donkey is now a medium of exchange, i.e. money. Instead of carrying donkeys around, you can instead carry some token, with the legend "I promise to pay the bearer on demand one donkey". You could even stamp a donkey's head on the token.
> if an economy is growing, it needs more money
I get that. But why does that mean the government has to print money (or buy back government bonds, or whatever)? Why does the market not automatically synthesise the means of exchange that lubricate the matching of supply and demand? Is it simply because a barter economy is inefficient? But then why doesn't a barter economy automatically produce means of exchange that are efficient?
Again, I apologise for my manifest ignorance.
Say you give me a donkey and I give you an "IOU - one donkey or equivalent". That IOU represents my debt to you. If my reputation is good, you could trade that IOU to someone else for say, 10 chickens, you pass my debt to them. If my reputation is really good, your town could pass my IOU around for different goods and then my IOU acts just like money.
Cash (and money) works the same way as an IOU. It's just that the owner of the debt is abstract and far removed from the holder of the cash.
So it seems that in an economy without money, money will arise automatically, in the form of debts that are to a greater or lesser extent formalised. So why do economies need central banks? What's wrong with that kind of "informal money"?
I have a strong suspicion that we don't; that it's governments that need central banks.
This is generally the way we react to that sort of things. And even if things still sometimes break (in slightly different ways than before) these systems have allowed us enormous amounts of economic growth.
The central bank won't have to set the interest rates anymore if the reserve requirement is something sane like 20% or 30% as banks are limited in their bank reserves and thus incentivized to choose the right interest rate for themselves. This also eliminates the need for QE.
You still need the central bank as an inter banking network by the way.
Pre fiat, economies did have continuous injections of gold and silver mining to provide debt free money supply. Would it be wrong to QE via direct printing and government spending? At least then we may get roads, bridges, and other societal assets out of QE vs record prices for picasso’s.
> "Well, under the circumstances, if it’s really inflation, monetary policy has to come in. This is a very difficult period for all central banks, because energy prices will continue to remain high for years because we are trying to change from fossil fuels to renewables."
A central factor behind high US energy prices in the USA are the facts that crude oil exports were opened up in 2015 after being banned since 1975 or so, and there were several major oil refinery closures right after that, and on top of all that, there's a big natural gas export push.
In corporate media today there's an almost complete ban on discussing trade policy, cross-border capital flows, and the effect of exports and imports on domestic prices (vaguely referred to as supply chain problems at best). Regardless it should be blatantly obvious that if you reduce domestic supply while demand is rebounding post-Covid, there's going to be a price spike.
Fossil fuel corporations like Exxon and Chevron have seen about a 40% spike in share value since December 2021, and trying to blame it all on the war in Ukraine doesn't make a ton of sense. A quick fix would be a cap on exports, but our bought-and-paid-for politicians would never dream of upsetting their Wall Street masters by doing so.
Why doesn't it make sense? Did oil companies suddenly get more greedy? Did some favorable legislation get enacted?
Similar problems have been caused before by producers artificially limiting output, but all indications are that the world's oil production genuinely is at its limit with current infrastructure or near enough to it as makes no difference. (Partly because the push for net zero, the risk of government restrictions, and ESG campaigns that made it hard to get funding all discouraged investment.) This means that there's no easy fix in the near future. In particular, confiscating those extra profits and handing them out to people in the hope they'll be able to afford stuff again just won't work - the reason they can't afford as much is because the supply isn't there and no amount of moving money around changes that underlying cause.
Also recall when looking money supplies that the M1 definition simply changed.
We have an energy problem — we could barely keep up with energy demand growth pre pandemic and now it’s 1970 all over again.
Also all the comparative advantage impact — that is the advantage in production of having eg Argentina focus on agriculture and exports which reduce overall prices requires predictable demand and solid transportation/shipping. Both as you can guess were “nuked” the last year and for the next couple of years at least.
The Fed can do nothing about any of these topics. Even if you have 3 billions if there are no pears in the market you are not going to eat pears. But people have to eat and commute and travel and live. Companies got to function. Thus, inelastic demand. Thus, inflation.
The Fed’s job is to keep its cool. It is political and it shouldn’t but it is what it is. Don’t expect anything they do to be different than TSA at the airport. Good luck to all of us.
Oversimplified example: So if I deposit $100, and the bank loans my money to someone who buys a car, and then the car company workers deposit their paychecks of, lets say, $100 in turn is re-lent out.. how is this not printing money and creating a deck of cards?
(for the record, Japan's banking reserve requirement is 0% as well. As the article points out, no one is borrowing, but here companies and consumers are swimming in debt)
The liabilities cancel out the assets, the system is symmetrical and balanced. Money printing implies asset without liability and that is almost guaranteed to cause inflation. It is also not what is happening right now. If people want to save more money, companies have to borrow more money into existence, how is this supposed to cause inflation? As I said, the system is balanced.
To help citizens deal with inflation, 14 states are giving them free money. Giving people free money is what caused inflation.
And even without, if it is true that Americans are trying to point all the world's supply chains to feed their increasing demand for stuff, that's still going to affect prices in the rest of the world, by leaving people in the rest of the world competing for a lower supply of stuff (since more of it is being ducted to the U.S.).
Unless suppliers are able to increase production to fill the overall higher demand, that is, but that just gets us back into supply chain issues caused by higher demand as a possible cause for inflation.
Yeah no. Not even a little. I know there's a narrative that Americans are just sitting on huge piles of cash and have too much money and it's tanking the economy, but it's pure bullshit.
Pandemic stimulus money probably did play some role, but that would be the corporate welfare, not the money that went into the hands of regular Americans who lost their jobs and couldn't work forcing them to live off of saving, or go into debt just to survive, or the 20 million Americans who just months ago were at risk of ending up on the streets. (https://www.cbsnews.com/news/eviction-19-million-americans-r...). The idea that these people "just have too much money" is beyond absurd.
The pandemic (which still rages) was a huge financial blow to a lot of people who are even now absolutely in need of aid. The pittance that most Americans got from Trump wasn't enough to cover their rent during the time they were unable to work. The checks that came from Biden were not enough for them to claw out of the financial hole covid dug either.
Out of desperation and a deep longing for normalcy after years of suffering and going without some of the little things that make life worthwhile there is now a lot of demand that the supply chain can't support, and a lot of companies profiteering and price gouging. That can't entirely be blamed for inflation either, but it has more to do with the problems we see today than a couple 1k checks going to poor people did, and arguing that people who are genuinely struggling shouldn't get the help they need today in order to try and save the bank accounts of obscenely rich people "struggling" in this economy is sick.
And that was when the pandemic was in full swing. Giving people free money today is not justifiable. If you give free money to help citizens counter inflation, that only cements the inflation. It is basic supply-and-demand principle. When people have more money, demand goes up, while supply remains constant (due to supply chain issues and so on). This causes prices to rise. To counter inflation that money should instead be spent on resolving the supply chain issues: When stores have too much stuff, they will slash prices [2].
[1] https://www.businessinsider.com/stimulus-unemployment-benefi...
[2] https://www.wsj.com/articles/stores-have-too-much-stuff-here...
Again, "demand" here means paying off credit card debit they needed to rack up to keep food on their tables and paying their rent to keep a literal roof over their heads. People who need the stimulus money aren't the problem.
Companies are blaming stimulus money for their hiring problems along with everything else they can think of besides their own abusive behavior and terrible pay/benefits. Why wouldn't they?
Covid made it crystal clear to people that companies don't care about them, or their safety. Can we blame people for not rushing back to them to be underpaid and treated like garbage?
> A federal program that paid $600 a week in unemployment benefits for part of 2020 meant that two-thirds of people collecting benefits made more than they had when they were employed
If you make so little money working that $600 is more than you'd earn after working 40 hours (including benefits like health insurance) you should stay home. That's not a problem with too much help for people, it's a problem with terrible terrible wages. When workers refuse to get a job for less than they need to survive that's supply and demand working too. We're just starting to see wages go up because of it. The wake up call of Covid has also helped pushed calls for unions.